On Wednesday, the Federal Reserve announced another hike on interest rates, raising it 0.75%. The increase comes as part of the reserve’s attempt to decrease inflation by cooling demand.

This affects many markets, but for those big-ticket items, it could be the difference between buying or not buying. One of those markets is real estate, which begs the question: what will this do to the housing market?

Roger Burlingame, financial planning adviser and co-owner of Equitable Advisors, said there are two arguments about what may happen to the housing market.

“There is a lot of argument about what the real estate market is going to do,” Burlingame said. “The two main arguments are that prices are going to stay the same while interest rates come up – that means it will be more expensive for someone to borrow and buy a house next year than it would this year because the price will stay the same, but the interest rate will be much higher.”

“The other argument is that house prices are going to go down,” Burlingame said. 

This is because as interest rates go up, it becomes more expensive to purchase a house, therefore eliminating some peoples’ ability to afford a house. As less people look to buy a house, prices will fall to match the fall in demand, according to Burlingame.

Burlingame also said 10% of houses saw price cuts this month as opposed to 6% last month, which points toward a drop.

“Price cuts are going up, mortgage applications are going down and inventory is going up,” Burlingame said. “So yes, although realtors are always going to be on the side of people saying that prices are going to stay the same, and now’s a great time to buy, I happen to be leaning toward the camp that prices are going to fall, because I do believe we’re entering a recession.”

A recession, Burlingame said, is when economic activity sees a major drop in spending, lasting more than just one quarter. This is seen as the gross domestic product (GDP), has dropped for the second consecutive quarter, according to the Federal Reserve, pointing toward what would typically be considered a recession.

This drop in spending would weaken the demand on the housing market, which means prices will fall to meet that demand.

In Corry, this would be advantageous as the demand has recently been much higher than the supply. Karen Puckly of RE/MAX Real Estate said she has seen a drop in houses on the market in the past couple of years.

“The demand is definitely greater than the supply,” Puckly said. “Prior to Covid, three years ago, we normally had a surplus of 50 houses on the market. Currently we have 17 houses on the market.”

Marsha Marsh, of Marsha Marsh Real Estate, said they have also seen this trend, as they normally have 1,000-1,200 total listings but currently have fewer than 300. She believes a lot of the lack of supply comes from the pandemic.

“They weren’t building homes, so that caused a lack of inventory,” Marsh said. “ A lot of demand for buyers wanting to purchase and lack of supply caused a slowdown in the market.”

Now, interest rates are on the rise, so even if someone could afford a house for a higher price previously, Marsh said that they may now not be able to afford something that expensive considering the interest.

Still, all agreed that now is the time to lock in interest rates because they are still at historic lows. Burlingame said even a 6-8% interest rate is a good rate compared to what it used to be in the 80s when it was around 16%.

Marsh noted that when she first bought her house in Corry in 1983, her interest rate was between 16-17%.

She mentioned that even then, people still bought houses, so she doesn’t believe that interest rates impeded buyers too much.

“In the 25 years that I’ve sold real estate, it has never been a seller’s market until now,” Marsh said. “All of a sudden, it became a seller’s market, and it’s slowly going back to a buyer’s market as you see the prices adjust down.”

This new turn comes with what she describes as a generational change, causing a higher turnover rate.

“Generationally, there’s a reason,” Marsh said. “This generation is instant gratification. If they want a house, they want what they want. They just go ahead and buy it or do it – it’s instant gratification. It’s not a negative, it’s just a different generation of how people are working through things. Those of us who are older and lived in our homes longer, we also kept jobs longer.”

Marsh said she believes remote work resulting from the pandemic caused a lot of change in the market as well, as people decided they wanted to downgrade, upgrade or not rent, after spending so much time in the house.

Rental prices are also on rapid rise, according to Marsh. She said at this point, renters are paying as much as they would on a mortgage, but those renting won’t see any of that money back as they might with an investment in real estate. Namely, buying a house could mean gaining equity.

“If you have a house that’s $200,000, and you only owe $125,000 on it, well guess what? That difference of $75,000 is what’s called equity,” Marsh said. “People sometimes use that to buy a car, and some people use that for their kids’ education. There are all sorts of things where you can be the bank for yourself. That’s why I would encourage a person to buy instead of rent.”

As far as renting though, Burlingame advises homeowners to only buy instead of rent if they plan to stay in the area for a while.

“People should buy a house as a primary family residence if they plan on being in place for at least five years,” Burlingame said. “Because when you factor in the interest you pay, the closing costs and all the expenses it takes to get into a house and get moved, even if you sell it for the same price, you’re going to be losing money until about five years go by, and you’re able to even out some of the charges you paid upfront and get some equity into the house.”

If someone still believes buying is the best option, the one thing Marsh said people shouldn’t do is go over their budget and over the price just because they want it. They may lose that equity if prices drop.

“You don’t want to over-purchase,” Marsh said. “If you can afford a house for $150,000, but you really like this one for $250,000, but the cost to purchase is so much more and it’s really what I like, well I understand that. I’d like to drive a jaguar, but I don’t, because I can’t afford it. It’s the same thing.”

Currently, Puckly said the average house price in Corry is around $130,000-$140,000 with outliers of $25,000 and about $500,000.

With so many unknowns to some buyers, including more raises in interest rates on the horizon, Burlingame and Marsh both agreed that having a real estate agent is advantageous. So, when cutting corners, keep in mind that a “for sale by owner” may not be the best option.

Marsh said the value of a realtor goes beyond just finding someone a buyer – it’s driving people around for weeks or months, working with the buyer to find the best fit.

“If you don’t want to pay a commission, I understand that,” Marsh said. “But then I don’t have a  fiduciary duty to help if you’re not going to pay me to.” 

Marsh said that even if she gives someone the contract, they often don’t know what to do with it and end up spending a large sum of money paying an attorney to write it.

“Their attorney is going to charge them billable hours to write the contract but won’t follow through on the contract with inspections, appraisal and taking it to settlement,” Marsh said. “That’s where I think it’s important to have a licensed real estate agent help you through that process, especially as a first-time home buyer.”