The fight against inflation is back on for the Federal Reserve, as they recently announced a quarter-point increase in interest rates. After raising rates 10 times in the past two years, the Fed had taken a break, but now believes it’s necessary to continue tightening measures. Housing economists predict that mortgage rates will trend down once the Federal Open Markets Committee signals that they have reached the peak for this cycle. This reduction in uncertainty should narrow the spread of mortgage rates relative to Treasury benchmarks, according to Mike Fratantoni, chief economist at the Mortgage Bankers Association.
The Fed’s rate hikes were implemented to cool down an economy that was rapidly rebounding from the 2020 recession caused by the coronavirus pandemic. However, the housing market that was characterized by record-high home prices and low inventory is starting to show signs of cooling. Home sales have dropped sharply and appreciation slowed, with home prices even dropping in certain markets. It’s difficult to precisely predict how the Fed’s efforts will impact the housing market, as home prices are influenced by various factors beyond just interest rates.
Higher rates present challenges for both homebuyers and sellers. Homebuyers have to deal with steeper monthly payments while sellers potentially face less demand and lower offers for their homes. Mortgage rates rose to over 7% in the fall of last year but have since dipped slightly. As of July 26, the rate on a 30-year mortgage stands at 6.98%, according to Bankrate’s national survey of lenders. It’s important to note that the Federal Reserve does not directly set mortgage rates. Instead, mortgage rates tend to move in sync with 10-year Treasury yields. Though the Fed’s policies don’t directly impact mortgage rates, they do set the overall tone for them.
The Federal Reserve raised rates seven times in 2022, which caused mortgage rates to rise from 3.4% to 7.12% before eventually declining. These increases in rates lower purchase affordability, making it more challenging for lower-income and first-time buyers to enter the market, according to Clare Losey, an assistant research economist at the Texas Real Estate Research Center. However, recent data suggests that home prices may be stabilizing. Despite the potential decline in prices this year, economists believe that in the long term, rising mortgage rates will have minimal impact on home prices and sales. Historical data supports this notion, as periods of high mortgage rates in the past did not deter Americans from buying homes.
In terms of advice for dealing with elevated mortgage rates, experts suggest shopping around for a mortgage to find a better-than-average rate. With the slowdown in refinancing activity, lenders are more motivated to attract borrowers. It’s also cautioned against choosing adjustable-rate mortgages (ARMs) as a means for affordability, as the potential risk of higher rates in the future may outweigh the initial savings. Instead, homeowners are encouraged to consider home equity lines of credit (HELOCs) if they need to tap into their home equity while keeping their lower mortgage rate intact. While a HELOC may have a higher interest rate compared to a mortgage, it can still be a more cost-effective option in certain situations.
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