These Housing Markets to Be Hit Hardest By Fed Rate Hike

The Federal Reserve will likely hike interest rates by another 25 basis points on Wednesday, adding further stress to housing markets that have been battling the hikes for more than a year.

Wednesday's rate hike will be the 11th increase since March 2022 as the Federal Reserve attempts to curb inflation. Last month, the Federal Reserve paused its rate hikes but is expected to resume the pattern on Wednesday. After the upcoming hike, the key rate will be in a target range of 5.25 percent to 5.5 percent, the highest rate since January 2001.

Some housing markets will be hit harder than others by the anticipated increase, specifically expensive homes in areas that have experienced a recent runup in prices. According to Professor Itzhak Ben-David, finance professor at Fisher College of Business at Ohio State University, these areas include Seattle, San Diego, New York, Los Angeles, Boston and Miami. Expensive properties in those cities will be adversely affected by a rate increase if the buyers require a mortgage.

However, Redfin economist Chen Zhao told Newsweek that higher-end properties often have more all-cash buyers. Properties that aren't purchased outright are usually middle- or lower-end properties, and those borrowers may be most impacted by the rate change because they require a mortgage.

Borrowers with adjustable-rate mortgages also will be adversely affected, according to Ben-David. The mortgages on those homes will increase as the Federal Reserve hikes interest rates.

"If wages don't increase in lockstep (and they often don't), the financial strain on these households increases, and their demand for expensive homes declines," Ben-David told Newsweek in a statement.

However, Zhao said that adjustable mortgages make up such a small portion of outstanding loans—only 3.5 percent—that she doesn't expect that impact to be monumental on the housing market.

When the Fed paused its hikes in June, housing market experts and economists lauded the decision and warned that another hike could deal a devastating blow to the housing market sector. However, despite inflation trending down, the Federal Reserve said that it would raise the key rates at least twice before the end of the year.

Because the July hike was widely expected, Zhao said markets have likely already priced in the increase. Wednesday's hike is less likely to affect markets than what the Fed reveals about future hikes at the meeting.

"It's possible the Fed will do something surprising...that will communicate something about the future," Zhao said.

Zhao added that the only action that could really change the housing markets at this point is if the Federal Reserve announces that there would be no more rate hikes past July. If that happens, which is unlikely, Zhao said the mortgage rates would drop.

Newsweek reached out to Zillow by email for comment.

Ben-David added that commercial real estate will behave in a similar fashion to residential real estate, "especially when tenants have long leases."

The interest rates have already started to take their toll on commercial real estate. In July, Starwood Capital Group defaulted on a $212 million mortgage for an office building in Georgia after its CEO warned of the adverse effect Federal Reserve rate hikes would have on the economy.

Values for office, retail and apartment buildings have plummeted by 11 percent and could drop as much as 40 percent, according to Nick Gerli, CEO of Reventure Consulting, which analyzes real estate data.