Higher interest rates, inflation could lower home prices in SLO County

June 23, 2022

Ziemowit Bednarek

Opinion by Cal Poly San Luis Obispo Finance Area

While the Federal Reserve’s actions to increase interest rates have placed home ownership even further out of reach for many Americans, those steadily rising costs might eventually help would-be buyers, said the chair of Cal Poly’s Finance Area.

“House prices are more likely to come down in the longer run as the Fed holds its course of fighting high prices with restrictive monetary policy,” said Ziemowit Bednarek, an associate professor of finance and chair of Cal Poly’s Finance Area. “In that sense there is definitely hope for prospective buyers.”

Hope is not something non-wealthy home buyers have experienced much of in recent years.

The median existing home price in the United States reached an all-time high of $407,600, according to Reuters. That’s 14 percent higher than last year.

The situation in California is even worse. Oscar Wei, deputy chief economist with the California Realtors’ Association, told KSBY-TV only one in five Golden State households can afford a median-priced home – a significant drop from the one in three who could just two years ago.

While the 3% mortgage rate was attractive to buyers during the pandemic, lack of available housing led to a seller’s market that drove prices upward.

But now that interest rates have increased, so too have mortgage rates, meaning already expensive homes will be even more costly to finance.

“In times of the restrictive, or high, interest-rate policy, loans are more expensive for both businesses and individuals,” Bednarek said.

Hoping to ease record inflation while preventing a recession, the Fed has increased the interest rate three times since March — with more penciled in this year. That in turn results in a higher mortgage rate, which doubled to 6%.

The impact is obvious to the consumer: The monthly mortgage for a $250,000 home would cost $356 more while the mortgage for a $750,000 home would be $1,067 more each month, according to the Washington Post.

Yet, again, there’s a little hope. Because eventually people are likely to just stop buying homes.

“Expensive loans will dampen the consumer demand and, at least in theory, lead to the lower demand in the housing market — and therefore lower prices,” Bednarek said.

But there is a caveat: “Since the COVID 2019 pandemic started in March of 2020, the economy has been undergoing a number of structural shifts — one of those being working from home,” Bednarek said. “People realized that they can move to a cheaper location and keep their job by working online. Of course, this caused the prices in those originally cheap markets to skyrocket.”

Also, higher interest rates could impact the construction of new homes, which already stalled during the pandemic, contributing to higher prices.

“Companies will be less likely to expand and hire, which will only deepen the shortage of new homes,” he said. “This part may, in fact, counteract the effect of expensive credit on the housing market itself, and keep existing home prices up.”

The recent developments prompt mortgage rate strategies. Buyers who lock into a 15- or 30-year fixed-rate mortgage would be protected from future interest rate increases. However, there are occasions where a more unpredictable adjustable-rate mortgage might make sense.

“If you do not plan to hold on to the house for too long, or if interest rate increases are not expected to last, it may make more sense to go with an ARM,” Bednarek said. “In our current market situation though, it looks as if the Fed is poised to keep hiking interest rates in the foreseeable future.”

Inline Feedbacks
View all comments

I think what Mr. Bednarek is actually trying to say, is that housing prices in SLO County have come down just enough that he can now afford a 1 bedroom condo in SLO City at his current salary of $210k + per year. Those who can’t, teach (and receive the higest pay for it by going to work for the government).

Do we really need someone to tell us that when rates go up the market slows down and sellers lower the asking price…thanks Captain obvious.

At first when I saw interest rates starting to creep up I was concerned as I was preparing to place one of my properties up for sale .Now I have relaxed and came up with a different plan.I am going to wait till interest rates are at almost their highest peak.Then I will carry a loan for the new buyer at say 6 or 8% . I own all my properties outright with no loans on them . I bought outside of California properties 7 years ago when they were cheap paid cash for all of them .I will also carry a 6 or 8% loan on them when I sell them .I do feel bad for buyers now and in future , but we may see more sellers offering seller financing as interest rates climb .Sellers get the benefit of having profit of a rental but no headaches that landlords have to deal with .. If new buyers eventually seek a new mortgage so be it , seller still made a nice profit

I liken this to when there’s a request to increase the city budget by say, 10% but the budget is increased 7%, its reported the budget was cut. In this case, instead of 1 million, the seller gets 980K – yeah, it went down, but….

Sellers will hold until the right buyer shows up. Many buyers have all cash. The desire to escape from … to the Central Coast will continue.

Yes, but not by much. In 2008 home prices in the North County dropped close to 50%, SLO, 10%. I think this time the North County will have more of that SLO immunity.

House prices will come down a bit, but interest rates will go up and the same people will be priced out of the housing market.

I am laughing too, an ARM with the expectation that the FEDERAL RESERVE, a private bank with a very large extended family, is going to give back some their entitlements to a signed and secured note. Not likely, until our government, you, is willing to bail them out again with other money that you have paid or will pay.

NO MORE BAILOUTS. No home owner bailouts, no corporate bailouts, no any bailouts. If you live by the sword, you die by the sword. You can’t ask for capitalism on your way up and then socialism on your way down.

Huh? Since when has capitalism been a major factor in California, let alone our local area anytime in the past 30 years? You forget that the government has long been the largest employer in our county, followed by Cal Poly (pretty much, still government). This is a case of communism on the way up, and socialism on the way down. Just a bunch of elderly baby boomer ideologues (living here on bloated government pensions) with long gray hair and at least 3 cats still blaming capitalism for all their woke failures. Hoping they can achieve here, the big-government utopian dreams that failed them so miserably in the big cities from which they came.

The best scenario yet…..

When I’m finished laughing I’ll post my comment…LOL lower housing prices here?…LMAO

Agreed, not here.