The Rise of Interest Rates and the Effect on the US Housing Market

February 17, 2022


Inflation has now spread deep into the US economy with the latest US inflation numbers hitting a 40-year high at 7.5%. The Federal Reserve minutes that were released on February 16, 2022 showed the Fed ready to raise rates and shrink its balance sheet to combat inflation that is now affecting the broader economy.

Originally the Fed thought the spiking prices would reverse as the world economies work through Covid affected supply and demand chain issues. However, this “transitory” story has been abandoned and the Fed has set plans into motion to start unwinding its nearly $9 trillion balance sheet.


The Fed’s Quantitative Easing (QE) was designed to repress interest rate and stimulate the economy as the US citizens battle through Covid hardship. But QE is scheduled to end in March 2022 and the Fed is already acting faster than anticipated to start its Quantitative Tightening program.

The recent Fed minutes that were published strongly indicated that an interest rate hike is on its way as soon as March along with buying back $20 billion in Treasuries and $30 billion in mortgage-backed securities in the next thirty days. These action matches succinctly with other central banks around the world. For example, The Bank of Canada and the Bank of England ended its QE program in October and December 2021, respectively. In addition, The Bank of England hiked its interest rates by 15 basis points in the last quarter.


The housing market finished 2021 with double-digit sales growth in many areas in the United States. With the increase in interest rates, the Fed is hoping to cool off the buying frenzy. If buyers cannot afford higher mortgage payments, then home prices will inevitably have to take a price cut.

However, I still believe that the real estate market will experience growth, albeit at a decelerated rate. The 30-year fixed mortgage rate currently sits at 3.1%. Fannie Mae is predicting that the average 30-year mortgage rate will only rise to 3.3% while the Mortgage Bankers Association is predicting a 4% rate by the end of 2022. Either way, there is currently a mismatch between supply and demand. Homes for sales are at the lowest level in more than three decades as developers are catching up from lack of construction during Covid 2020-2021. The millennials, who have built up enough equity and are now entering first-time homebuying age of 30 years old. These attributes could continue to support the housing market, again at a slower rate, despite the Federal Reserve’s commitment to raise interest rates.


While certain parts of the National market seem overheated, the local market sees no signs of decline. After a stagnant 24 months, sales prices for new condominiums in Brooklyn and Queens are moving upwards, sparked by increasing demand and low inventory of new units. Per a recent report by Corcoran Marketing, inventory on new units is down almost 20% over the last year, while sales increased sharply – with the average unit on the market less than two months. The result has been bidding wars on new units, sending some prices significantly over asking price.

These local factors combined with the larger national issues leave us expecting steady market growth over the next 12 months.