The Federal Reserve has resumed its efforts to combat inflation by raising interest rates. After a break in June, the central bank announced a quarter-point increase in rates at its July 26 meeting. With inflation reaching 3%, close to the target of 2%, housing economists believe that this round of tightening may be coming to an end. Mike Fratantoni, the chief economist at the Mortgage Bankers Association, anticipates a downward trend in mortgage rates once the Federal Open Markets Committee signals the peak of the cycle. The Fed’s rate hikes were aimed at cooling down the economy, which had rebounded strongly after the 2020 recession caused by the COVID-19 pandemic. The housing market experienced record-high home prices and low inventory levels. However, the housing market has shown signs of cooling in recent months, with a decline in home sales and a slowdown in appreciation. While interest rates play a role in home prices, they are influenced by various factors, making it difficult to predict their exact impact on the housing market. Higher rates present challenges for both homebuyers, who face higher monthly payments, and sellers, who may receive lower offers or experience less demand for their homes. Mortgage rates reached over 7% in the fall but have slightly decreased since then, with an average rate of 6.98% as of July 26. The Federal Reserve does not directly set mortgage rates, but they tend to move in line with 10-year Treasury yields. The Fed’s policies set the overall tone for mortgage rates, as lenders and investors closely monitor the central bank. However, individual life events that prompt home purchases are not always aligned with mortgage rate cycles. In the past, Americans continued to buy homes despite high mortgage rates. The current slowdown in the housing market may be a return to normalcy rather than a sign of a housing crash. Affordability has been greatly reduced due to high mortgage rates and steep home price growth in recent years. However, if mortgage rates decrease, affordability will improve. In order to deal with elevated mortgage rates, borrowers are advised to shop around for better rates and be cautious about adjustable-rate mortgages. Homeowners may consider home equity lines of credit (HELOCs) to tap into their home equity instead of taking out new loans at higher rates.
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