Federal Reserve increases interest rates by 0.75% could benefit the housing market

COLUMBIA, Mo. (KMIZ)

The Federal Reserve made the largest interest rate increase since 1994 on Wednesday.

The increase comes as a response to the record-high inflation rates. The Consumer Price Index reported that inflation increased to 8.6% in May, and CPI reported that Shelter has risen by 0.6% putting it at 5.5%.

Joe Haslag, a University of Missouri professor and Kenneth Lay Chair of Economics, says that equity prices responded in a positive way to the interest rate increase. Haslag says that most people in the mortgage market seemed to expect the Federal Reserve to increase the interest rate.

"They seem to be believing that this was going to have a positive effect on future inflation in a way that they could demand a lower interest rate on Treasury securities that were two years, five years, 10 years, and 30 years," said Haslag.

Haslag said that the market seems to be both on the bonds, risk-free bonds, and equities.

John Mayfield, president of the Missouri Realtors, said that the increase will have an impact on the housing market.

"I think this has good and bad news for us," said Mayfield. "Interest rates are going up, which reduces the purchasing power for most homeowners. Housing prices have been going so high, so fast, that it has priced many people out of the market."

Mayfield said that this might cause the housing market to slow down.

"So I think overall it might actually be a good thing for many home buyers, because of the fact that prices might become a little more reasonable," said Mayfield.

Chris Martin, a broker associate with Reece and Nichols of Mid-Missouri and the immediate past president of the Board of Missouri Realtors, said that when looking at interest rates historically, 5% isn't "really that bad." Martin said that if you look back to the 80's interest rates were closer to 15%, and when he started working in reality 10 years ago, interest rates were "hovering around 5%."

Martin said that since then interest rates dropped to three and four percent, and people became used to that rates, so 5% seems high. Martin said that "we've weathered this before," and believes that buying a house is still "a great hedge against inflation that we're seeing these days because it is a fixed-rate loan. So once you get locked in at that rate, even if they continue to increase, you're still going to be locked in at a lower rate."

Martin said, "homeownership continues to be typically the number one way for households to increase their wealth."