The Federal Reserve’s any-day-now rate increase announcement has prompted the real estate industry’s version of the Y2K jitters. Even before the hike becomes reality, we’re already seeing signs of a market reaction, said Mark Fleming, chief economist at First American.

  • Housing demand and home price appreciation are showing signs of abatement in anticipation of the Federal Reserve's decision.
  • Predictions are pointing to first-time homebuyers as the players who will be most affected by the shift.

The Federal Reserve’s any-day-now rate increase announcement has prompted the real estate industry’s version of the Y2K jitters. Even before the hike becomes reality, we’re already seeing signs of a market reaction, said Mark Fleming, chief economist at First American.

According to Fleming, demand is falling in anticipation of a 25 basis point increase in the 30-year fixed mortgage rate, causing a downtrend in home price appreciation.

“Rising mortgage interest rates and moderation in house price appreciation were the most important market fundamentals that reduced market capacity this month,” Fleming said. “Now that interest rates are pre-adjusting in response to signals from the Fed for a highly expected increase in December, demand is also declining.”

Even without a rate increase, price appreciation may slow by 1 percent on a year-over-year basis, with existing home sales abating by about 2.5 percent annually, he added.

“The housing market isn’t doomed by a Fed rate increase, but demand would fall modestly,” Fleming said.

Fleming also announced a new First American product, the Real Estate Sentiment Index (RESI), which will measure title agent sentiment on key market metrics each quarter.

According to the first RESI survey, real estate agents’ friends on the title side expect the Fed’s rate hike will impact first-time homebuyers the most. But title agents believe interest rates would need to reach at least 5.1 percent before residential transaction volume is affected, according to the RESI.

“Title agents view first-time homebuyers as most impacted by a potential interest rate hike, while remaining optimistic regarding the level of sale transactions for those first-time homebuyers in the next 12 months,” Fleming said. “Expectations for future homeownership demand remain positive, despite changing market conditions.”

Whether the flurry of predictions will be confirmed by a long-term noticeable shift or “much ado about nothing” is yet to be seen.

Email Amy Swinderman.

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