How Is the Miami Real Estate Market Affected By Interest Rates?
Miami remains one of the hottest real estate markets in the United States, with PwC and the Urban Land Institute’s Emerging Trends in Real Estate report ranking the city number two in the country in terms of real estate prospects. The Miami-Dade County real estate market saw consistent growth throughout 2024, fueled by in-migration, the strength of the job market, an influx of businesses, and the growth of the area’s status as a regional transportation hub. These factors, combined with an appealing lifestyle, multicultural community, and proximity to urban centers and natural attractions such as the beach, suggest that Miami’s real estate market will continue to thrive in relation to the rest of the United States throughout 2025. However, how will interest rates affect the regional and national real estate sectors?
The Effect of Interest Rates on the US Real Estate Market
The real estate market is affected by interest rates in the United States, with lower interest rates leading to lower mortgage rates and a larger appetite for home purchases, while higher interest rates have the opposite effect. Over the past three years, interest rates have been at their highest level in over two decades, a situation that has somewhat dampened the demand side of the real estate market in the country. This has been somewhat offset by a housing shortage crisis in the United States, particularly in cities like Miami, which are extremely attractive to home buyers.
All things equal, high interest rates tend to have a dampening effect on the real estate market—even beyond making it more expensive to buy a home. Homeowners who obtained a mortgage at a lower rate are less inclined to sell, even if they want to move. In addition, homeowners with a variable rate mortgage will see their payments rise as interest rates climb.
Why Interest Rates Have Been So High
The US Federal Reserve raises and lowers interest rates in an attempt to control inflation, which is the rate at which goods and services increase in price each year. Higher interest rates make borrowing less attractive, which theoretically has a restrictive effect on economic growth, while lower interest rates have the opposite effect. Economists tend to agree that a 2% inflation rate is the happy medium for maintaining optimum employment rates in the United States, while also keeping price increases at a sustainable level. Higher inflation tends to price out many Americans, making the cost of living too high for them, while ultra-low inflation (or deflation) can reduce consumer spending and create a stagnant economy that doesn’t grow at the ideal rate, meaning less new businesses and less new jobs.
In 2022, inflation in the United States hit around 9%, the highest it had been in over 40 years. This was due to several factors, including supply chain disruptions caused by the COVID-19 pandemic, government stimulus checks (which increased the circulation of money, leading more people to spend—with the added demand pushing prices higher), and the Russian invasion of Ukraine, which disrupted the supply of a variety of products, including oil. This inflationary pressure was not felt only in the United States, but around the world, with some countries seeing prices increase by 100-280%.
To reduce inflation in the United States to the target rate of 2%, the Fed raised interest rates throughout 2022 and 2023, with the base rate going as high as 5.5% in July 2023. This increase led to a related increase in mortgage rates, with the average 30-year mortgage rate in 2023 rising to nearly 7%. This represented a massive change from 2021, when average mortgage rates were at historic lows of less than 3%.
The elevated mortgage rates in 2023 and 2024 had an obvious downward effect on the US real estate market, but things began to improve as inflation came down and the Fed began reducing interest rates. Inflation had decreased to 2.4% percent in September 2024, when the Fed initiated its first rate cut of 50 basis points, or half a percentage point. This was followed by cuts of 25 basis points, or one-fourth of a percentage point, in November and December 2024.
Interest Rate Outlook for 2025
Further interest rate cuts are anticipated in 2025, but recent policy changes by the Trump administration are predicted by many economists to increase inflation, leading the Fed to pause interest rate cuts in February 2025. Some of these policy changes include 25% tariffs on Canadian and Mexican goods, as well as a 20% tariff on Chinese imports (up from 10%).
It is unclear how long interest rates will remain at their current level, which is 4.25–4.5%. The current average 30-year mortgage rate stands at about 6.6% percent as of March 10, which is an improvement from 2023 and 2024, but much higher than during the real estate boom of 2021.
At the same time, major spending cuts and layoffs throughout the government that began in January 2025 may cause the US economy to cool, which could bring Treasury yields down. As such, some financial experts expect mortgage rates to fall slowly throughout 2025 and into 2026, presenting a potential boon for the real estate market.
How the ongoing economic situation and subsequent interest rate decisions by the Fed will affect the real estate market in the US as a whole and Miami in particular over the next year remains to be seen. That said, many with a vested interest in the real estate market are naturally hoping to see interest rates continue to drop over the next 12 months.
