The Fed’s high interest rates put the real estate industry of the U.S. under stress. Americans stay away from buying new homes with higher mortgage rates. Simultaneously, their hybrid work conditions leave empty offices at risk of depreciation and commercial mortgage overdue. Banks impose stricter requirements now to avoid the industry-wide financial crisis.
Fewer buyers, fewer sellers
New home listings in the U.S. are 20% down in April year-over-year. They show that more homebuyers quit the real estate market nowadays. The reason behind their decision is the regular interest rate hikes.
There have been ten significant interest rate hikes since the beginning of 2022. In 2021, the rates for 30-year-long mortgages were at their all-time low, around 3%. The rate hikes have doubled that figure. So by now, Americans choose to pay out their mortgages with lower rates rather than buy new homes with 20-year-record-high rates.
Only in March has the mortgage payments risen by 1.6%, according to Mortgage Bankers Association.
Experts say: The fewer homebuyers there are, the fewer sellers there are too. Such conditions of low inventory (i.e. supply), high mortgage rates, and high prices create a market where residential real estate is as unaffordable as ever.
Fewer office workers, lower office prices, higher risks
At the same time, the Fed is paying more attention to commercial real estate, which also has a hard time due to the rate hikes and the pandemic. After the many lockdowns, working from home became a regular practice. White-collar staff prefers hybrid or fully remote working modes to offline. Office buildings, consequently, fall in demand and prices.
In the regular Financial Stability Reports, the Federal Reserve warns that falling demand may cause a sudden change in commercial property prices. At the same time, the borrowing costs have been increasing together with the interest rates. The Fed is wondering whether commercial mortgages could be refinanced and paid off under these circumstances without overdue and problems related to it.
Experts say: Non-residential real estate makes up only an insignificant share of the assets owned by U.S. banks. But they impose greater risks on smaller banking organizations. To balance it out, the banks have developed one of the tightest policies for commercial real estate loans since 2008. Still, the demand for such loans decreases too.