As Interest Rates Increase, U.S. Housing Struggles

The Federal Reserve has raised the federal funds rate from 0.25% in 2015 to 1.5% in 2018. With this small increase in interest rates, we are seeing problems brewing across the board in the U.S. economy. Could rising rates lead to a recession in 2018?

The U.S. housing market is emerging as one of the biggest victims of the higher interest rates. Consider this: in January, sales of already built homes (existing homes) amounted to an annual rate of 5.38 million. This was 3.2% from the month earlier and down 4.8% year-over-year. (Source: “Existing-Home Sales Slip 3.2 Percent in January,” National Association of Realtors, February 21, 2018.)

iStock.com/nkrivko

What’s so troublesome? Well, January marked the second consecutive month where existing home sales declined. On an annual basis, this was the biggest year-over-year decline in three years.

There was one more problem: first-time home buyers are dissipating. In January, first-time home buyers were behind just 29% of existing home sales, down from 32% in December 2017 and 33% from January 2017. In a normal market, 40% of existing home sales are by first-time home buyers.

Sadly, this may just be a trailer of what’s ahead. Know this; housing market is highly correlated to mortgage rates. The federal funds rate are the most basic interest rates. As they go up, mortgage rates will go up as well. So all of a sudden, you will have a lot more Americans who won’t be able to buy homes.

Car Sales Tumbling

Beyond the housing market, look at car sales.

In January, the annual rate of total vehicles sold in the U.S. economy was 17.5 million. Go back to September 2017, and this rate was 18.9 million. If you do simple math, this represents a decline of roughly 7.4% in matter of a few months. (Source: “Total Vehicle Sales,” Federal Reserve Bank of St. Louis, last accessed February 21, 2018.)

You see, thanks to low interest rates, car loans were easily available. Now, as rates are rising, car sales are dropping. Not surprising whatsoever.