Inflation is still well above plan, meaning the Federal Reserve is keeping policy on hold. The Fed had expected to raise interest rates 11 times in 2022 and 2023, then reverse policy this year. But with inflation above 3%, policy is on hold. After the Federal Reserve's June 12 meeting, its fourth meeting this year, Chairman Jerome Powell announced that policy would again be on hold, leaving interest rates unchanged. The Fed also signaled that interest rates will likely be cut only once this year, instead of three times as previously expected.
“Mortgage rates have been high for a long time, but they're likely to remain in the high 6% range through the second half of the year,” said Lisa Sturtevant, chief economist at Bright MLS, a major real estate brokerage service in the Mid-Atlantic region. “Some homebuyers who were put off by the housing market difficulties may be waiting until rates come down to purchase. Home sellers may have to negotiate more to attract potential buyers.”
The Federal Reserve and the Housing Market
Earlier in the inflation cycle, the Fed was hiking interest rates by as much as 0.25 percentage points. Now, inflation has fallen to 3.3%, still higher than the official 2% target but not far off. So this round of tightening seems over. But until inflation is closer to the target, housing economists are wondering when the expected rate cuts will begin.
“We expect mortgage rates to fall to around 6.5% by the end of 2024,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.
To combat inflation, the Fed raised interest rates aggressively in 2022 and 2023, including just one increase of three-quarters of a percentage point. The rate hikes were aimed at cooling an economy that was on fire as it recovered from the coronavirus-induced recession of 2020. That dramatic recovery included a booming housing market marked by record high home prices and minuscule levels of inventory.
The Federal Reserve's interest rate hikes have slowed the housing market and caused home sales to plummet, but home prices remain near record levels. Because home prices are determined not just by interest rates but by a complex combination of factors, it is difficult to predict exactly how the Federal Reserve's actions will affect the housing market.
Rising interest rates are tough on both homebuyers, who have to deal with higher monthly payments, and sellers, who are seeing less offers on homes as demand for them drops. Mortgage rates have fallen slightly since hitting 8% last fall. As of June 12, the average interest rate for a 30-year mortgage was 7.10%, according to Bankrate's national survey of lenders.
How the Fed Impacts Mortgage Rates
The Federal Reserve doesn't set mortgage interest rates, and the central bank's decisions don't affect mortgages as directly as they do other products, such as savings account or certificate of deposit rates. Instead, mortgage rates tend to move in tandem with the 10-year Treasury yield.
Still, Fed policy will determine the overall direction of mortgage rates. Lenders and investors watch the central bank closely, and the mortgage market's attempts to interpret the Fed's actions will affect mortgage payment amounts. The Fed raised rates seven times in 2022, a year that saw mortgage rates soar from 3.4% in January to 7.12% in October. Mortgage rates are set to rise further in 2023, briefly reaching 8%.
“These price increases will reduce home affordability, making it more difficult for low-income and first-time homebuyers to buy a home,” said Claire Losey, an economist with the Austin, Texas Association of Realtors.
What will happen to the housing market if interest rates rise?
There's no doubt that record-low mortgage interest rates fueled the housing boom of 2020 and 2021. Some believe it was the most important factor behind the rapid growth of the residential real estate market.
The housing market has slowed dramatically as mortgage rates have soared to their highest in two decades, and while sales volumes remain sluggish, prices are soaring. The national average price of an existing home in April was $407,600, up 5.7 percent from a year ago and approaching the NRA's all-time high of $413,800, according to the National Association of Realtors.
Over the long run, housing economists say, home prices and home sales tend to be resistant to rising mortgage rates because the individual life events that prompt homebuying — the birth of a child, getting married, changing jobs — don't always line up conveniently with mortgage rate cycles.
History proves this: In the 1980s, mortgage interest rates soared to 18 percent, and Americans still bought homes. In the 1990s, interest rates of 8 percent to 9 percent were the norm, and Americans kept buying home after home. During the housing bubble of 2004-2007, mortgage rates were high, but prices soared.
So the current slowdown may be more a sign of an overheated market returning to normal than a sign of a housing collapse. “The combination of rising mortgage rates and skyrocketing home prices over the last few years has significantly reduced home affordability,” Fratantoni says.
But as mortgage rates fall, your ability to pay becomes less important. For example, borrowing $320,000 at a mid-June interest rate of 7.10% would result in a monthly payment of $2,151 for principal and interest, according to Bankrate's mortgage calculator. Borrowing the same amount at 8% would result in a monthly payment of $2,348, a difference of about $200 a month.
But continued declines in mortgage rates could create a new challenge: A surge of new buyers could possibly enter the market, exacerbating the shortage of homes for sale.
Next steps for borrowers
Here are some pro tips for dealing with rising mortgage rates.
Compare mortgage rates: If you shop smart, you can find better-than-average rates. With the refinancing boom slowing considerably, lenders are eager for your business. “Doing an online search can save you thousands of dollars by finding lenders offering lower interest rates and more competitive fees,” says Greg McBride, chief financial analyst at Bankrate. Beware of ARMs: Adjustable-rate mortgages can look attractive, but borrowers should avoid them, says McBride. “Don't fall into the trap of using an adjustable-rate mortgage as a payment buffer,” he says. “You'll save just half a percentage point on average over the first five years, with little upfront savings, but you'll be exposed to a lot of risk of future interest rate increases. New adjustable-rate mortgage products are structured to change every six months, instead of every 12 months, which was previously the norm.” Consider a home equity loan or HELOC: With mortgage refinancing on the decline, many homeowners are tapping into the equity in their homes with a home equity line of credit (HELOC). The reason is simple: If you need $50,000 to remodel your kitchen and you have a $300,000 mortgage at a 3 percent interest rate, you probably don't want to get a new loan at a 7 percent interest rate. You're better off keeping your mortgage rate at 3 percent and taking out a HELOC, even if it costs 10 percent.
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