The Federal Reserve unleashed another hike to its short-term benchmark rate last Wednesday. The increase, the Fed’s largest since 1994, likely will have an impact on the housing market, economists say.
The Fed’s key rate often influences mortgage rates, though it doesn’t directly affect them. Rates are moving at a much faster clip than most housing analysts forecast.
On Wednesday, the central bank’s Federal Open Market Committee voted to increase its benchmark funds rate by three-quarters of a percentage point to help tame inflation, which is at a 40-year high. Banks use the Fed’s rate as a benchmark for what they charge one another for short-term borrowing.
The Fed’s latest hike sets a “big increase in interest rates and means several more rounds of rate hikes are on the way in upcoming months,” said Lawrence Yun, chief economist of the National Association of Realtors.
So far this year, the short-term Fed funds rate has jumped by 175 basis points. The 30-year fixed-rate mortgage has jumped even more — by nearly 300 basis points. For a $300,000 mortgage, the monthly payment has increased from $1,265 in December to $1,800 today, Yun said.
“That’s painful and, consequently, will shrink the buyer pool,” Yun said. “Home sales have recently been trending down toward 2019 figures. Sales could fall even further, with some inventory sitting on the market for more than a month like in pre-pandemic days. Pricing a listed home properly will, therefore, be the key to attracting buyers.”
Mortgage rates will stabilize when consumer price inflation starts to fall, Yun said.
Rising Mortgage Rates
Last week, the 30-year fixed-rate mortgage averaged 5.23%, according to Freddie Mac. A year ago, rates averaged 2.96%. By some measures, mortgage rates were just shy of 6% — at 5.99% — on Wednesday. Consumers haven’t seen mortgage rates above 6% since 2008.
The pace of this move is what’s most concerning, as consumers’ buying power evaporated quicker than any time in recent memory. Further, volatility in rates may not decrease anytime soon.
More aspiring home buyers are getting priced out. In response, mortgage applications, a gauge of home buying demand, have been falling by double digits. Mortgage rates going forward will continue to be responsive to changes in expectations around the Fed’s policy path, as well as inflation expectations.
The housing market is still extremely tight, with inventory levels remaining near historic lows, leaving room for the market to absorb falling demand.
The Fed committee hopes its more aggressive approach will help lessen inflation. “Clearly, today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common,” Fed Chairman Jerome Powell said at a news conference last Wednesday.
Still, Powell said he expected the Fed’s July meeting to see another increase of 50 or 75 basis points, but he said decisions will be made “meeting by meeting.”
Nevertheless, the committee still appeared optimistic about the economy.
“Overall economic activity appears to have picked up after edging down in the first quarter,” the committee said in a statement. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply-and-demand imbalances related to the pandemic, higher energy prices and broader price pressures.”
The committee is forecasting inflation to move significantly lower in 2023.
As with everything else that deals with real estate, contact your local trusted Realtor for guidance and help.
Bob Walsmsith Jr. is the 2022 president of the Santa Barbara Association of Realtors (SBAOR). He is a California licensed real estate agent with Berkshire Hathaway HomeServices California Properties here in Santa Barbara. He has served on and chaired several committees within the SBAOR, and served on its board of directors for the past five years. Bob can be reached at 805.720.5362 and bob@bobwalsmithjr.com.
