The central bank does not directly set the cost of mortgages, but changes Its policy rate — known as the federal funds rate — ripples through the economy and affects loans of all kinds. The Fed has raised interest rates five times since March, raising its benchmark rate from near zero to between 3% and 3.25%. The central bank is expected to raise interest rates by 0.75 percentage points next week.
Calculate how much a mortgage will cost as interest rates rise
The moves are already having a major impact on the housing market, with soaring mortgage rates prompting some The broader concern is that the Fed is putting the brakes on the economy too hard.
“People can say, ‘Well, you know, one percent [added] Mortgage rates remain low. But we’ve got several percent mortgage rates in a short period of time,” said KPMG chief economist Diane Swank. “The speed at which they’re raising rates is itself destabilizing. “
Average mortgage rates have risen dizzyingly. A year ago it was 3.09%; even in March, the average rate on a 30-year fixed mortgage was below 4%. 7.08 from 3.22% in January It is now up 3.86 percentage points, the largest increase in a year. The previous record was 3.59 percent in 1981.
Prices rise again in September, securing more rate hikes
For much of the pandemic, low interest rates meant aspiring buyers flooded the market, vying for the few available homes, sending prices soaring. But now, buyers are pulling out amid fears of paying hundreds of dollars more a month on their mortgages, increasing the supply of available homes and helping prices fall overall. This year, a family with a median household income of $71,000 can afford a home worth $448,700 with a 20% down payment when interest rates are below 4%. With interest rates around 7% this week, they can only afford a $339,200 home, according to Realtor.com.
Home prices are falling at a record pace. The Case-Shiller Home Price Index, released earlier this week, showed house prices rose 13% in August from a year earlier, down from 15.6% the previous month. The 2.6 percentage point difference between the two months was the index’s biggest drop since its debut in 1987.
Zillow announced Wednesday that it had laid off 300 employees across several divisions, including home loans and closing services, although the company said it had not frozen hiring.
Mortgage demand has also fallen sharply as interest rates have soared. Total filings are at their lowest level since 1997, according to the Mortgage Bankers Association. Refinancings are down 86% from a year ago, and mortgage lenders across the country, including major banks, have laid off staff as the market slows. Rising interest rates have boosted interest in adjustable-rate mortgages. ARM’s share of applications is 12.7%.
Home builders were also squeezed. Overall housing starts fell 8.1% to 1.44 million units in September, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau earlier this month. So far this year, Single-family starts were down 5.6 percent from this point last year.
Builder confidence also fell for the 10th straight month in October to its lowest level since 2012, excluding two months in spring 2020 when the pandemic started. That’s half of what it was six months ago.
“This will be the first year since 2011 that single-family housing starts have declined,” Robert Dietz, chief economist at the National Association of Home Builders, said in a statement. “Given expectations that interest rates will continue to rise due to Fed action, more single-family home construction is expected to decline in 2023 as the housing contraction continues.”
Still, the Fed’s tools are limited, and officials often point to the housing market as one of the clearest signs that its rate hikes are having the desired effect.
“We’re starting to see some adjustment to excess demand in interest-rate-sensitive sectors like housing,” Fed Governor Christopher Waller said in a speech this month. “But more needs to be done to make inflation meaningful and durable. decline.”
when Or how the Fed’s rate hikes will outpace inflation in the rest of the economy is unclear. Rate hikes are designed to stifle demand, but they do nothing to address supply-side problems, such as shortages of oil and gas, affordable apartments or chips for new cars. Overall, consumer prices remained high, rising 8.2% in September compared to a year earlier.
Rental costs have also risen by 7.2% over the past year, while rent It rose 0.8% in August-September. Goldman Sachs forecasts headline housing inflation to peak at 7.5% next spring before slowly decelerating to just under 6% by the end of 2023. This has major implications for Fed policy, as housing costs make up a large portion of the basket of goods used to measure inflation in the economy.
If the Fed fights inflation, there are fears it will overcorrect
But a slowing housing market could also eventually lead to lower rental prices. According to Realtor.com, the national rental growth rate fell to the slowest annual rate since June 2021 (7.8%). Median rents in the US fell in September for the second time in eight months.
Rising mortgage rates are slowing the market, even as it’s red hot during the pandemic. Sales prices in the Hudson Valley have exploded in 2020 and 2021, as transplants from New York City and elsewhere scramble to snap up the few available homes. As mortgage rates have soared, the number of available homes has more than doubled in the past three months, jumping from about 150 to about 380, said Ryan Basten, associate agent at Berkshire Hathaway HomeServices Nutshell Realty.
This is an encouraging sign that the market is returning to some form of normalcy. But Basten said there is a lot of uncertainty ahead. He recalls the recent surge in mortgage rates: 5% is “not bad,” he said, 6 Percentages are “doable”. But as the Fed prepares to raise rates two more times by the end of the year, Basten said he and others in the industry “wonder if there’s going to be a real downturn in the market.”
“We can only deal with what we’re dealing with right now. I don’t see mortgage rates going up to 10 [percent]. If they do, it feels like a recession,” Basten said. “Eight [percent] not feeling good. Ten percent would say, ‘Wow, where are we going from here? “