What does the latest Fed rate hike mean for mortgage rates?

• The recent Federal Reserve rate hikes will not directly affect mortgage rates, but their effect on the economy could push them up or down.
• Mortgage rates are more directly affected by investor demand for mortgage-backed securities.
• If the Fed can get inflation under control, mortgage rates could come down in the years to come.

Inflation causes Americans to spend more in all areas of their budget, including their mortgages.

Mortgage rates have risen more than 2 percentage points so far in 2022. The average home buyer who gets a mortgage today is taking on a monthly mortgage payment that is likely several hundred dollars more than they would pay if he bought when mortgage rates were at historic lows. in 2021.

As inflation rose, the Federal Reserve acted more aggressively to bring it under control. The main way to do this is to raise the federal funds rate, most recently by 0.75 percentage points at the end of July.

For homebuyers, hearing that the Fed is raising rates can be alarming. But while the Fed often has an impact on whether mortgage rates go up or down, the central bank rate and mortgage rates aren’t as closely related as some might think.

The Fed is trying to control inflation

The federal funds rate is a tool the Fed uses to influence inflation. In June, inflation reached its highest level in 41 years. Too high inflation is bad for the economy, so the Fed raises rates to increase the cost of borrowing and slow economic growth.

“The Fed needs to rein in inflation, and making loan products more expensive slows spending,” says Shashank Shekhar, founder and CEO of InstaMortgage. “So a sharp spike is how the Fed says, ‘Okay, we have to slow down before we can speed things up. “”

What the Fed’s rate hike means for mortgage rates

When the federal funds rate rises, short-term consumer rates also tend to rise. This includes things like credit cards and car loans.

But the Fed’s impact on mortgage rates is less direct and more dependent on the economic conditions it addresses. In the days leading up to the Fed’s July meeting, mortgage rates actually fell, although most investors were expecting another 75 basis point hike, or 0.75 percentage points.

Investor expectations for Fed policy can drive mortgage rates up or down

Once a consumer has taken out a mortgage, it is sold and packaged into a type of bond called a mortgage-backed security (MBS). Investors who buy MBS watch Fed actions closely and try to predict how those actions might impact the economy, which in turn impacts their investments.

Currently, inflation is high, which erodes their investment returns. For this reason, lenders need to raise rates to make their mortgages more attractive to investors. So if investors believe the Fed will not be able to control inflation, mortgage rates could rise.

If recent Fed rate hikes are successful in cooling the economy, mortgage rates could stay at current levels or decline slightly. But if the central bank fails, the cost of getting a mortgage could continue to rise, along with other goods and services. If the economy cools too much and we enter a recession, rates could fall.

In its July forecast, the Mortgage Bankers Association predicted that 30-year fixed mortgage rates would remain above 5% for the rest of 2022, but would begin to slowly decline to 4.8% by the end of 2022. 2023.

What does the Fed rate hike mean for home buyers and sellers?

As mortgage rates have risen, more potential buyers have been driven out of the market due to a lack of affordability. This reduced buyer demand and slowed the housing market somewhat.

“The fewer homes bought today will finally open up much-needed inventory and lower home prices in key markets so people can buy,” Shekhar said. “And people will buy, even at a higher rate, if the price is right, because they know they can refinance at a better rate when the Fed starts to cut interest rates again once inflation goes down. back under control.”

If you’re ready to begin the home buying process, you don’t have to let the current economic climate hold you back. Rates are high, but if you’re willing to re-evaluate your budget to reflect that, you may still be able to find a home that meets your needs.