Will Expected FED Interest Rate Hike Cause an Increase in Foreclosures?

The FED is expected to raise interest rates by as much as .75%, a move that is expected to crush demand for real estate as millions of buyers already reeling from sky-high inflation are priced out of the market for the foreseeable future. At the same time, the expected rate hike is also sure to impact current homeowners struggling to make monthly payments as estimates indicate that about 10% of borrowers have an adjustable-rate loan. What’s more, homeowners who are struggling to cope with additional expenses may find it difficult to refinance home loans as rising FED rates means a 3% mortgage interest rate hike for borrowers with good credit and a 5% – 6% interest rate hike for those who have less than stellar credit ratings.

Granted, increased FED interest rates aren’t the only factor accounting for rising foreclosure rates. Statistics show that there was a year-over-year increase in foreclosure activity starting from April 2021. However, in March 2022, the first month in which the FED hikes the interest rate, there was a total of 33,333 properties with foreclosure filings, far more than the 16,545 properties foreclosed on in February 2022. The FED subsequently raised rates even more in May and July, and the foreclosure rates have risen during these months as well. According to current estimates, 164,581 homes were foreclosed on in the first half of 2022 alone. The number is set to continue rising if there are rate hikes in the future, especially if the FED needs to hike the rate more than once in the last half of 2022 and/or the first half of 2023.

While rising FED interest rates are boosting foreclosure rates, they are also keeping buyers out of the market. Zillow has already significantly revised its outlook for home sales, stating that it expects only 5.3 million home sales to be made this year. While foreclosed homes sold at auctions and sheriff’s sales are naturally more attractively priced than homes on multiple listing sites, even these homes could be difficult if not impossible to sell in the current market as many investors are joining homeowners in waiting to see how the market performs in the next few months before making a move.

FED interest rate hikes are, beyond a shadow of a doubt, contributing to the rise in foreclosures. Many home buyers became accustomed to historically low interest rates and so financed or refinanced a home with an adjustable-rate loan rather than a fixed one. Many of these homeowners are now struggling to make payments now that interest rates have risen and are expected to keep rising for the foreseeable future. At the same time, homeowners struggling to keep up with fixed loan payments are unable to refinance due to rising rates, and many will likely lose their homes unless the cost of food, gas, and other necessities falls in the next few months. In short, it’s a trying period for the real estate industry and lenders alike as supply rises and demand plunges.


U.S. Foreclosure Activity Sets Post Pandemic Highs in Q1 2022 | ATTOM (attomdata.com)

Top 10 U.S. Housing Markets with Greatest Numbers of Foreclosure Starts in February 2022 | DFD News

What Is the Federal Interest Rate and How Does the Fed’s Change Affect You? (moneycrashers.com)

Adjustable Rate Mortgages As A Percentage Of Total Loans: So Low! (financialsamurai.com)


Zillow Home Value and Sales Forecast: August 2022 – Zillow Research