After a historic period of rock-bottom interest rates and equally historic infusions of cash into the economy during the COVID-19 pandemic, the Federal Reserve raised interest rates yesterday by a half of a percentage point and announced plans to reduce their $9 trillion balance sheet. Both of these moves are aimed at fighting rising inflation, including in the housing market. In March, they brought the rates up a quarter percent to 0.25 – 0.50, and now they are setting the rates at 0.75 – 1.0, a half-point jump. 

Those looking for homes in North Carolina’s hot real-estate market may be wondering how the move will affect sky-high prices. Carolina Journal asked Robby Oakes of CIMG Mortgage how the rise in interest rates will impact North Carolina’s current market. Oakes’ team has been the No. 1 purchase lender in North Carolina for four years in a row, according to the Scotsman Guide. 

“By raising the rates they are inherently going to push some buyers that can’t afford the new payments and investors out of the market or the returns may not make sense,” Oakes said. “So they will decrease some of the buyer pool. The problem is, right now the buyer pool is so extensive that it’s going to take some time for these rate increases to make their way through the market.” 

This crowded buyer pool and lack of inventory — not just in N.C. but across the country — has created a home-buying frenzy and prices far above the norm. An investigation by ABC11 found that homes in many neighborhoods in Raleigh are selling for an average of $250,000 more than they did in 2016. The average home in Wake County has seen a $154,000 increase in value since 2016.

“The Fed itself is very concerned with home prices getting out of control,” Oakes said. “So while our market is incredibly hot, the Fed is basically doing everything they can to create inventory. Our market is hot because it’s really an inventory crisis. It’s not a healthy market. It’s way too tilted in favor of the sellers right now, and what that does is create scorching hot appreciation.”

He said you could have a couple years of appreciation and not have any problems. But if you get into the third year of 10% or 15% appreciation, it does start to create the risk of a bubble.

“Now don’t use that bubble term as something to scare people,” Oakes said. “They’re simply saying that if it continues, then we could have one — not where we are now. Specifically, the Fed wants people to buy for shelter and long-term investment but not for speculation. So they’re trying to raise interest rates and create inventory along with fighting inflation.” 

Oakes said the mortgage rates, which are separate but connected to the Fed rates, actually went down following the Fed announcement. This is due to the fact that the market was expecting the hikes, and stability and predictability often ease market anxieties. 

“The Fed gave the market what it expected,” he said. “It’s really the unexpected that roils the markets.” 

Ultimately, Oakes said, the only thing that he says will improve the lack of housing inventory is to have fewer people chasing these limited homes. 

“You’ve got to get these speculative buyers and investors to sit on the sidelines and allow people that need shelter an opportunity to buy homes. I think a slow down in the housing market will create a much healthier housing market. Right now, it’s an unhealthy market for a buyer to be buying in.” 

An additional risk looking ahead is the slowdown in the economy, with a 1.4% contraction in GDP growth in the last quarter. Oakes said this could make the Fed lower the rates again, which would contribute to the same problems being seen now with housing prices and inventory. 

“Right now, we need sustained high rates to create a balance in the market so that buyers can touch and feel a house,” Oakes said. “A lot of buyers are having to buy from their couch, because if you take the time to go see a property, it’s already under contract.”

He said because “North Carolina is one of the most desirable places to live,” people from California and other more-expensive markets are moving to the state in large numbers. So what seems like a bargain for them is pricing out everyone else. 

“For example, in parts of the coast in California, $2.2 million would get you a 1,200 square-foot condo. Whereas, in North Carolina, $2.2 million is still going to buy you a 4,000 or 5,000 square-foot house in almost any market that we have, outside of maybe some of the water-front property.”

While there isn’t anything he sees on the horizon that will make housing prices decline, Oakes did say that if the Fed does their job, there should at least be an improvement in available inventory.

John Locke Foundation’s senior vice president of research, Brian Balfour, agreed that the rate increase would address some of the inflation in prices. But he said it likely will not be enough to undo the damage the Fed has already done.

“The latest Fed action to raise interest rates is an acknowledgement that inflation is not transitory and is threatening the economy,” Balfour said. “By raising interest rates, the Fed is hoping to address the damaging consequences of their unprecedented money printing over the past several years. But with inflation running close to double digits, raising the federal funds rate just to 0.75% to 1% will do little to rein in the runaway inflation train.”