Mortgage rates to 6.7 percent as Fed fights inflation

Becky Enrico-Crum spent much of the pandemic driving to keep up as aspiring homeowners flocked to Idaho. But toward the end of this summer, the president of Boise Regional Realtors felt the frenzy finally ease.

Prices in the area fell 4.4 percent between July and August, although they had risen 6.6 percent from 2021. Homes now last weeks on the market, as opposed to days. Her clients don’t have to engage in fierce bidding wars or struggle to make cash offers.

“We are not crashing; we level out,” said Enrico-Crum. “We’re just trying to figure out what that price point is. That’s what everybody’s trying to figure out.”

Why is the Fed raising interest rates?

The long-awaited shift — from white-hot housing market to something more normal — is playing out across the country as mortgage rates escalate to the highest levels in 15 years, pushed in part by the Federal Reserve’s efforts to slow the economy and bring down inflation. The average interest rate on a 30-year fixed mortgage, the most popular home loan product, hit 6.7 percent this week, according to data released Thursday by Freddie Mac, a level not seen since July 2007. The rate is up a full percentage point since September 1, and it was 3.01 percent a year ago.

The housing market has cooled ever since the Fed started raising interest rates in the spring. And it cools clearly faster as rates rise. U.S. home prices fell in July compared with June, marking the first month-on-month decline since January 2019, according to the closely watched S&P CoreLogic Case-Shiller National Home Price Index. In August, sales of existing homes fell for a seventh straight month to the lowest level since early pandemic foreclosures, according to the National Association of Realtors. Sales fell 0.4 percent from July to August and 19.9 percent from 2021. There are even early signs that rental prices may ease.

The Fed raises interest rates by 0.75 basis points to fight inflation

“It’s really important to look at how much a sector like housing that boomed out of the pandemic is more vulnerable,” said Diane Swonk, chief economist at KPMG. “It was not only supported by low rates, but it was also supported by homework and other shifts. Some of these shifts won’t go away, but the low rates will.”

Last week, the Federal Reserve raised interest rates once again by 0.75 percentage points, and the bank is expected to raise them twice more before the end of the year. The Fed does not set mortgage interest rates specifically, but changes them its benchmark interest rate — known as the federal funds rate — ripples through the economy and affects all forms of lending. Since the spring, the Fed has raised it interest rate from near zero to between 3 percent and 3.25 percent, sending mortgage rates on a rapid upward streak.

And they may not stop here, especially since the Fed has a long way to go in the inflation battle. Consumer prices rose unexpectedly in August, with rent and food remaining major burdens. Stock markets have tumbled for weeks as policymakers make clear they are far from seeing the kind of progress they would need to scale back their interest rate campaign, and as central banks around the world simultaneously raise interest rates.

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Many economists are predicting a recession later this year or in early 2023, especially since interest rate hikes work with a lag and may not fully grip the economy for months. The housing market reacts very closely to any interest rate movement. But many other parts of the economy do not.

Asked this week about fears that the central bank won’t have enough time to gauge the impact of rate hikes, said Charles Evans, president of the Federal Reserve Bank of Chicago, “Well, I’m a little nervous about exactly that.

“There are delays in monetary policy and we’ve moved quickly,” Evans said. “We have made three increases of 75 basis points in a row, and we are talking about more to reach the 4.25 percent to 4.5 percent by the end of the year. You don’t leave much time to look at each monthly release.”

Calculate how much more mortgages will cost when interest rates rise

The Fed’s rate hikes are designed to cool demand, and in the housing market, that means wiping out buyers who, until a few months ago, were vying for a handful of houses, sending prices to record highs. Fed officials hope their policy can slow down the housing market without completely inciting a crash. Demand for mortgages has fallen as fast as interest rates have risen. The total number of applications has fallen six out of the past seven weeks, according to the Real Credit Board. Refinancing is 84 percent lower than a year ago.

“The reality I share with my clients is that people bought homes when prices hit 7 percent 20 years ago, and they will continue to buy homes when it’s higher or lower,” said Geetesh Kapoor, producing branch manager at Fairway Independent mortgage credit company. “If the goal is to buy a home, you can always refinance it later when prices fall.”

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But monetary policy cannot solve the housing market’s other major problem: not enough houses. Low inventory continues to plague the housing market. The housing shortage is exacerbated by homeowners who are reluctant to sell because of their low mortgage rates. According to Black Knight, 90 percent of borrowers have a mortgage interest rate below 5 percent, and two-thirds have one below 4 percent.

“Many potential sellers are locked into low prices that make moving up to a much more expensive mortgage a difficult transition, keeping inventory low,” said Nicole Bachaud, senior economist at Zillow. “This rebalancing puts more power in the hands of some wealthy buyers who can afford to remain active in the sales market, with more time to make critical decisions, less competition and more bargaining power than at any time in the past several years. more year.”

Estimates for the lack of the country’s housing supply range widely from 1.5 million to 5 million. But it is clear that housing and rent prices will remain high until there are more places to live.

Interest rate increases make it even more difficult to close this supply gap. Phil Crone, executive director of the Dallas Builders Association, said higher interest rates come on the heels of persistent supply chain shortages of everything from windows to garage doors. But Crone hopes the Fed will manage to raise interest rates and tame inflation without triggering other consequences, such as causing companies to lay off people and make construction labor shortages worse — or gobble up the housing market altogether.

Demand for new housing in North Texas remains strong, especially with the area’s solid job growth, Crone said. There’s also a generational component: Many millennials have a de facto fear of high interest rates, but Crone’s parents’ generation is used to much higher mortgage costs. If in the future inflation falls and interest rates find a middle ground, the market will be much more sustainable.

“Right now it’s just a matter of going from this hyper-acceleration to finding our feet again,” Crone said, “which could make for a bumpy six months or so until we find it.”

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