The federal funds rate is the target interest rate set by the Federal Open Market Committee. This is the interest rate at which the Fed suggests commercial banks borrow and lend their excess reserves to each other overnight.Just over two years ago, when the pandemic began, the federal funds rate plunged to zero. These lower rates prompted more buyers, to jump into the housing market. The prolonged low interst rates offered some financial relief to homebuyers in the hot housing market during the past year.
The consumer price index (CPI), which indicates the rate of inflation by looking at the cost of consumer goods and services, rose 6.8% for the previous 12-months ending in November. The highest jump for a one-year period since June 1982. As inflation soars, the Federal Reserve focuses on bringing inflation under control. The central bank is now raising interest rates and expects more increases in 2022. The rapid increase in rates took Fannie Mae (FNMA) by surprise. FNMA forecasted that the thirty year fixed interest rate would average 3.3% in 2022 and 3.5% in 2023.
Are rising interest rates impacting Los Angeles real estate? This used to be a fairly simple question to answer. When interest rates increase, it costs more to purchase a home, and demand diminishes. Price appreciation slows, and homes typically take longer to sell. This year, the forecast is not as clear cut. The Los Angeles real estate market has been so hot, many worry that rising rates will finally be the straw that turns the tide.
Rising interest rates often fuel buyer demand by creating a sense of urgency. Buyers have even more motivation to buy before interest rates increase further. Often potential buyers are fearful that if they do not buy a home soon, they may never be able to afford one. Even as rates have begun to climb, most listings continue to sell with multiple offers. The price of new listings continues to rise, which is a very bullish indicator for selling prices throughout 2022.
Are rising interest rates impacting Los Angeles real estate? Do not expect home prices to drop anytime soon. There are simply not enough homes listed for sale. At best, rising interest rates may slow down the Los Angeles real estate market creating a bit more of a balanced market. With people lined up to buy houses for so long now, increased costs have not deterred demand enough to bring down prices.