Redfin Economist Q&A: How Rising Rates and Economic Uncertainty Could Impact Home Prices, Migration, Rentals and More

• Redfin economists answered questions about what’s likely to happen in the housing market as the economy stumbles. 

• High mortgage rates will likely keep homebuyer demand below the pandemic peak. Whether mortgage rates go up or down from here depends largely on whether inflation calms down or remains stubbornly high. 

• Home prices are past their peak but probably won’t fall below pre-pandemic levels at the national level.

• The cooling housing market will prop up demand for rentals in the short term. An influx of newly constructed units could help cool the rental market in the long term. 

• Fewer people will move from one metro to another amid high rates, and pandemic boomtowns will attract fewer new residents.

• Redfin economists advise sellers that it’s less risky to sell now than wait until next year.  And buyers who are wary of high mortgage rates can consider adjustable-rate mortgages and consider refinancing opportunities in the future. 

Mortgage rates have doubled since the beginning of the year to nearly 6%, taking a toll on affordability and demand. The monthly payment on a $400,000 home rises more than $550 with rates going from 3% to 6%. That increase, along with the slumping stock market and recession fears, have already pushed many buyers out of the market and cooled the housing market from its red-hot pandemic peak.  

What will happen if the Fed raises interest rates again? Are home and/or rental prices going to decline? Should prospective sellers put their plans on hold? See the answers to those questions and other insights from Redfin’s economists below. 

If/when the Fed raises interest rates again, will mortgage rates go up?

The Federal Reserve instituted the biggest interest-rate hike in nearly three decades last month in an effort to dampen consumer demand and combat inflation. 

• Taylor Marr, Redfin Deputy Chief Economist: A lot of factors have come together to push mortgage rates to their highest level in 13 years and dampen home sales. High inflation expectations and the Fed tapering their purchases of mortgage-backed securities (MBS) both contributed to the interest-rate hikes, which have in turn pushed up mortgage rates. The bright spot for homebuyers is that the spike in mortgage rates has already happened. The current 6% mortgage rates already have future interest-rate expectations baked in. I expect interest rates to remain high and the housing market to remain relatively quiet for the next few months. 
• Chen Zhao, Redfin Economics Research Lead: The consensus in the economist community is that the Fed will raise interest rates again in July by 50-75 basis points followed by three smaller hikes later this year. As long as those expectations remain unchanged, mortgage rates will probably hold steady. But if inflation remains high or another economic factor causes the Fed to respond aggressively, the Fed could increase rates more than expected and mortgage rates could rise again. 

Is a recession coming? If so, how will that impact the housing market?

• Daryl Fairweather, Redfin Chief Economist: The likelihood of the U.S. entering a recession late this year or in 2023 has increased over the last few months. But even if there is a recession, the housing market looks resilient. In the long run, housing is a stable investment and less risky than other assets. 
• TM: Home prices have passed their peak. A lot of homes are less valuable now than they were a few months ago–but they’re still more valuable than they were three years ago, and they’ll likely stay that way. The impact to housing depends largely on the severity of the recession. Unemployment increasing sharply–which hasn’t happened yet and isn’t expected to happen–would put an additional strain on demand because people will have less money. But if the recession is mild, mortgage rates could fall and housing demand wouldn’t slow down further. 
• CZ: I agree that its impact on housing depends on employment. Some people who lose their jobs would have to sell their homes, and maybe there’s not a huge market of people looking to buy because they’re also financially constrained. Even in a mild recession, the unemployment rate would likely tick up to 5% or 6%, a noticeable increase but not nearly as high as Great Recession levels. It does seem like we’re set up for a  textbook recession that’s fairly mild: Demand got too hot. Let’s cool it down. Right now, individual bank accounts and businesses remain fairly healthy. 

What’s going to happen to home prices?

• DF: Home prices will decline year over year if there’s a recession, and they’ll decline from their peak even if we don’t enter a recession. But prices aren’t likely to fall below pre-pandemic levels nationwide. We’re seeing a lot of negative news, and economists are prepping for a worst-case scenario. But remember, that doesn’t mean the worst is going to happen. 
• TM: Some markets will see year-over-year price declines, and some won’t. Places that had big demand booms during the pandemic like Boise and Sacramento will likely see prices decline, while places that remain relatively affordable may not. The most expensive metro areas, and those with a lot of tech workers like the Bay Area, are also likely to see prices decline as the stock market falters. 
• CZ: For homeowners, buyers and sellers, all that matters is what happens in your neighborhood. That’s going to vary a lot from place to place. Buyers and sellers should pay attention to their local area. 
• TM: For a lot of homeowners, the decline is only on paper. If you’re not selling or refinancing your home in the next six months or year, your home being worth a little less now than it was a few months ago won’t impact you. Home values typically rise over time. 

How will interest rates impact the rental market?

Rental prices rose sharply during the pandemic. Nationwide, rents were up 15% year over year in May, with the median monthly asking rent surpassing $2,000 for the first time. 

• TM: Short term, the cooling housing market will prop up demand for single-family rentals, sustaining monthly rental price growth. Long term, it could go either way. The cooling market could continue to intensify demand and push up prices. But there are roughly a million rental units being built in the U.S., and some homeowners are choosing to rent out their properties rather than sell in the uncertain market. Both of those factors could help with supply and affordability for renters in the coming months. 

Will migration patterns change due to how much more expensive homeownership has suddenly become?

A record share of Redfin.com users looked to move to a different metro area during the first five months of 2022, continuing a pandemic-driven trend of relocation. A lot of homebuyers have moved from one metro area to another since the start of the pandemic–often from expensive coastal areas to more affordable places like Phoenix, Las Vegas and Tampa–largely because doing so became more feasible with remote work.

• TM: I expect migration to decline for the same reason home sales are declining: When mortgage rates are up, people stay put. That’s the “lock-in” effect, where homeowners want to keep their low mortgage rate. But as a share of housing activity, migrants may still make up a larger portion of homebuyers than before the pandemic. High housing costs will also impact where people are going and change migration patterns. The pandemic boomtowns, like Austin and Boise, will be among the first to dry up because they’re so much more expensive than they used to be. We’ve already seen that happen in Austin, Nashville and Salt Lake City. Places that are still relatively affordable, like San Antonio, may become more popular. 

How will interest rates and/or a recession impact new construction?

The pandemic-driven buying boom intensified an existing housing shortage, drove up home prices and put a spotlight on the need for more newly constructed homes. As of the first quarter, there were promising signs that homebuyers were making progress adding new supply after years of a shortfall, with building permits up–especially in Sun Belt hotspots. 

• TM: New construction of for-sale homes is often the first sector to take a hit from rising rates and economic cooldowns, so construction will continue to slow. Some projects that are already in progress may be converted from for-sale properties to rentals. One bright spot for builders is that the cost of lumber, which rose sharply during the pandemic, has actually started to decrease. Lumber prices are way down from the pandemic peak. But still, other material costs are still rising and builder sentiment is down. 

What’s your advice for sellers who regret not selling sooner because they could have earned more on their home in February or March?

• DF: If you’re thinking of selling your home, it’s less risky to do it now than wait until next year. I advise pricing slightly below comparable homes in your neighborhood to get buyers’ attention. I can’t tell you exactly what’s going to happen in the future, but I can tell you that prices are still high right now, even if they’re a little lower than they were a few months ago. A year from now, we may be in a recession and prices may be lower. 
• TM: Be realistic. A lot of home sellers are dropping asking prices because they’re pricing too high. That’s mostly because their expectations are unrealistic: Maybe they’re basing prices on one-off information, like a neighbor’s home selling for $100,000 over list price a few months ago. You should be making decisions based on data, which will tell you we’re past the days of getting 30 offers and selling for six figures above list price. 

What’s your advice for buyers who regret not buying a home earlier this year, when their mortgage payment would have been lower?

• CZ: You have options. Remember that you aren’t locked into a 30-year mortgage with a 6%-plus rate. Homebuyers have the option of refinancing in the future when rates come down. I would also consider an adjustable-rate mortgage. Buyers can save tens of thousands of dollars over a few years by taking out an ARM, which have lower interest rates, instead of a fixed-rate mortgage. Borrowers can also refinance their ARM into a fixed-rate loan down the line. ARMs are risky because it’s hard to predict where rates will be when the loan resets, but they’re a good option for some buyers, maybe those who aren’t risk averse or those who know they won’t keep the home for long. 
• TM: If you’re going to live in your home for seven years or longer, remember that not only can you change your mortgage rate by refinancing, but your home value will likely go up. You don’t need to worry about year to year changes in prices. Even if the value of your new home declines next year, the housing market is very unlikely to crash. Ride the ups and downs. Housing is a stable place to invest; it’s steadier than the stock market right now. And one great way for buyers to cope with high interest rates in a cooler market is to “buy down” the mortgage rate with higher points. That essentially means buyers pay more upfront for lower monthly interest payments. 
• DF: Take advantage of the fact that you’re less likely to encounter a bidding war than earlier in the year. You’re much less likely to pay six figures over the asking price in a competitive frenzy. That could outweigh the impact of higher mortgage rates and actually save you money.