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In One Chart: How the Fed is ‘collapsing’ real estate activity with higher interest rates

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U.S. real estate has undergone a dramatic slowdown in transaction activity in the months since the Federal Reserve began jacking up interest rates.

Sales of existing homes plunged from peak pandemic levels to about 4.1 million in November (see chart) from over 6 million units sold per year in 2021 as the Fed has dramatically raised interest rates to tame inflation.

U.S. real estate transaction volume has collapse with higher rates

Deutsche Bank, RCA, National Association of Realtors, Bloomberg Finance

Similarly, the chart shows commercial real estate transactions dropping off a cliff after they rose 40% higher than their prior peak in 2019, according to a new client note from Deutsche Bank research.

“Real estate is one of the key levers the Fed can use to slow the economy; higher rates are dramatically reducing US real estate activity,” a Deutsche research team led by Ed Reardon wrote in a weekly market briefing.

They also noted that mortgage rates of about 6.5% in both sectors will allow the Fed “to unwind some exuberance” in the housing market, where prices climbed about 40% since March 2020 and roughly 30% in commercial real estate.

Related: The party is over in commercial real estate. Here’s what to expect in 2023.

The Fed began rapidly increasing its policy interest rate from near-zero in March to help bring inflation that peaked above a 9% annual rate this summer closer to its 2% target. Its federal funds rate was increased to a 4.25% to 4.5% range in December, the highest since 2007, with another rate bump expected in February.

Earlier this week, San Francisco Fed President Mary Daly said she expects the central bank to boost interest rates above 5% to get inflation down. A new monthly update on consumer inflation due Thursday is expected to show inflation falling for six months in a row to a 6.5% annual rate.

U.S. stocks have staged a modest rally to start 2023 as some investors interpret retreating price pressures and moderating wage gains as signs that the economy might still avoid a recession, even though central bankers keep saying to expect high rates until inflation deeply recedes.

Read: Inflation is slowing, CPI to show. But is it slowing fast enough for the Fed?

The S&P 500 index
SPX,
+0.78%

was up 0.7% on Wednesday ahead of Thursday’s inflation reading, while the Dow Jones Industrial Average
DJIA,
+0.42%

was up 0.4% and the rate-sensitive Nasdaq Composite Index
COMP,
+9.14%

was 1.1% higher, according to FactSet.

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