For the first time in three years, the Federal Reserve, in an effort to curb persistent inflation, raised interest rates by a quarter percent.

It’s a move that could impact South Florida’s local housing market.

“I think it comes at a tough time in South Florida,” said Adrie Bailey, Associate Vice President of Originations at BridgeInvest.

Craig Kirsner, president of Kirsner Wealth Management, said, “The condo market in South Florida has definitely stalled recently, for a couple of reasons. New financial requirements requiring assessments for repairs and maintenance are raising costs, and insurance costs are very high. So the fact is that the condo market has definitely stalled.”

Indraneel Chakraborty, a University of Miami professor of finance, said, “House prices have gone up significantly and now you have finance that house at a very high interest rate, because the ability of consumers to demand those houses decline as interest rates rise.”

The market is already showing signs of cooling.

“Miami is one of those locations where house prices have really risen,” Chakraborty said. “So housing is becoming even less affordable with high rates.”

Kirsner said, “So rising housing costs, soaring insurance premiums, high HOA fees make living in Miami much more expensive. It’s one of the most expensive places to live already. So, having higher mortgage rates only adds fuel to the fire and makes things more even more expensive to live in Miami.”

It also makes it harder for builders to bring new housing projects online.

“Some projects simply won’t get done,” Bailey said.

It’s something that could put increased pressure on supply.

“Which over time increases the cost of housing,” Bailey said.

Rising housing costs could then exacerbate existing affordability issues, according to the experts.

“Once you have housing taken care of, the remaining income statement is also compressed, because you have to spend everywhere else,” Chakraborty said.

In an era when nearly everything else, from gas to groceries, is getting more expensive, Chakraborty said the pain goes beyond housing.

“So the pain will be felt not just in housing affordability but affordability in life in general,” Chakraborty said.

“While the Fed’s decision could continue to influence mortgage rates, the reality is, it’s expensive to borrow money right now,” added Kirsner. “The average mortgage rate is over 7% and this news of higher rates likely won’t much do much better to lower those. And the fact is, this might not be the last increase either. The Fed is really facing the question of whether it will need multiple increases to help curb high inflation.”

Said Bailey: “The Fed has to think about the entire country and unfortunately the Fed has essentially one major tool and I like to say that tool is a bit of sledgehammer — it is not a scalpel.”

That takes us back to the Fed and why it raised the rate in the first place.

“The conflict in Iran continues to keep oil prices high, and that’s caused inflation globally to be high, and that’s why many countries have already started raising interest rates. So having the U.S. raise rates would be a normal course of business in line with what’s happening around the world,” said Kirsner.

“Unfortunately inflation has been rising so the Fed is increasing rates in order to lower the rate of inflation,” said Bailey.

Added Chakraborty: “And that would be good, but it comes at the cost of short term pain. The only way out of the significant inflation that we saw for everything is real wage growth. Real wage growth means growth beyond inflation. If accounting for just inflation you have essentially no wage growth so real wage growth is wage growth beyond inflation and that has been tepid.”

ADDITIONAL INFORMATION FROM KIRSNER

Q: WHY DID THE FED CHOOSE TO INCREASE INTEREST RATES NOW?

• Inflation remains stubbornly above the Fed’s target rate and has steadily increased this year due to the conflict in Iran.
• The Federal Reserve’s ideal target inflation rate is 2%, and the current number is 3.4%.
• Surging investment in AI data centers has also accelerated inflation and contributed to higher long-term interest rates.
• It’s the first interest rate cut in over three years, and more may be coming. It is rare for the Fed to lift its key rate just once, which is likely to have little impact on the economy, and so multiple hikes are likely.

Q: HOW DO HIGH INTEREST RATES IMPACT THE MIAMI REAL ESTATE MARKET?

• While this decision could influence mortgage rates, the Federal Reserve doesn’t control them. It sets target interest rates for banks borrowing money from each other, which can influence the interest rates you and I pay.
• However, it’s expensive to borrow money right now. The average mortgage rate is7.07%, and this news likely won’t do much to lower those. This may not be the last increase either - the Fed is facing a question of whether it will need multiple increases to curb inflation.
• Rising housing costs, soaring insurance premiums, HOA fees and more are making housing expensive in Miami. Currently, the cost of housing is 57% higher than the national average.

Q: HOW ABOUT THE CONDO MARKET IN MIAMI?

• The condo market has been stalled recently. New financial requirements requiring assessments for repairs and maintenance for South Florida condo buildings are raising the cost of living in condos, and that’s causing some owners to get rid of their units.
• However, it has shown signs of rebounding. Sales for condos between $400,000 and$500,000 rose by 12% year over year in July.
• But if rising interest rates continue to push borrowing rates up, current condo new buyers may be less incentivized to enter the market.
• Condo prices are pulling back with less demand in the market. It could be an opportunity to get a condo at a discount.
• I encourage those who are in the market for a condo, or looking to sell, to speak with a financial professional about their options and what they can afford.

Q:WHAT SHOULD PEOPLE DO TO MAKE SURE THEY ARE FINANCIALLY PREPARED TO OWN A HOMEOR CONDO?

Revisit Your Budget

• Your budget will likely need an overhaul when you own a home, so now is a great time to practice. Adjust your plan to allow for new expenses and priorities.
• If you don’t have a budget yet, create one! It helps track your spending, encourages good saving habits and helps you plan ahead for home ownership costs.
• Create a budget line for home maintenance. It’s typical to spend about $1 per square foot of your home every year on maintenance.
• The money you save by budgeting for home ownership before you buy can be used to purchase necessities for the house once you’ve moved in.

Keep Saving

• Saving up for a down payment and closing costs can feel overwhelming, but saving as much as possible consistently can bring you closer to your goal of owning a home.
• I recommend using a separate savings account to avoid the temptation to spend what you save. Using a CD or high-yield savings account can help your savings grow even faster.
• You can also set up automatic withdrawals from your paycheck deposits to avoid the temptation to spend rather than save.
• When working towards a large financial goal, it helps to have a strategy written down to keep you accountable.

Build Your Emergency Fund

• Homes are bound to have unexpected emergencies like broken plumbing, mold problems or storm damage.
• I recommend setting aside 3-6 months’ worth of living expenses, so you won’t need to take on debt to make ends meet when major unexpected costs come up.
• This money is set aside for emergencies like home fixes, medical purposes or temporary layoffs. To avoid spending the money, keep it in a separate account from your daily checking account.

Q: SHOULD PEOPLE PUT OFF SAVING FOR RETIREMENT TO BUY A HOME OR CONDO?

• It can be tempting to put off saving for retirement in order to save more for a home, but it doesn’t pay off in the long run.
• Saving at an early age by contributing consistently towards a 401(k) or another retirement account can help you reap the benefits of compound interest.
• Even if you want to buy a home as soon as possible, avoid withdrawing money from your retirement accounts because you’ll owe taxes and pay penalties on those funds. Saving money for your future may not offer as much instant gratification, but setting yourself up for a secure retirement can bring immense peace of mind down the road.

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