Fed rate hike means ‘mortgage rates will keep rising’: Economist
Mortgage rates have risen steadily over the past year, and with the Federal Reserve’s latest rate hike, there likely won’t be a slowdown any time soon, an economist says.
Rising interest rates “mean that mortgage rates are going to keep going up and we’re going to see some pullback in the housing market,” Conference Board chief economist Dana Peterson said on Yahoo Finance Live (video). above). ). “And that’s a function, yes, of very high prices affecting affordability, but also of rising interest rates.”
The Fed raised interest rates by 75 basis points on Wednesday, and the central bank said it “expects continued increases in the target range to be appropriate.”
Mortgage rates, meanwhile, are 5.4%, according to Freddie Mac, more than two percentage points higher than they were at the start of 2022.
The Fed sets the rates that banks use to borrow money from the central bank. As Fed interest rates rise, this directly influences mortgage rates, as lenders also tend to increase interest payments on loans to homebuyers.
The Fannie Mae Home Buying Sentiment Index fell to 64.8 for the month of June, its second lowest reading in a decade. According to the survey, only 20% of consumers think it’s a good time to buy a home right now.
“When we look at our own confidence measures, people say they backtrack on their home buying expectations,” Peterson said.
What the Fed’s Next Decision Could Mean
For homebuyers, higher interest rates generally decrease their purchasing power.
Pending home sales – homes under contract for sale – are a leading indicator of the health of the housing market. This number fell 20% last month compared to June 2021.
Current homeowners with fixed rate mortgages won’t feel the same impact as buyers and sellers unless they plan to sell their home in the near future. However, homeowners with adjustable mortgage rates will see their interest payments increase in the future.
According to Peterson, this is exactly what the Fed wants to see in the current inflationary environment: a “easing of domestic demand”, with housing being an important component.
Housing demand has accelerated over the past two years. At the height of the coronavirus pandemic, interest rates fell to historic lows. At the same time, many home buyers have left the big cities in favor of suburbs and small towns.
“Then you have millennia,” Peterson said. “They are all in their 40s, they have families and they are looking for the next improvement in their housing. All of these things are a demand that the Fed wants to mitigate. »
Peterson predicts the Fed is not done with raising interest rates yet, saying the central bank could even enter “restrictive territory,” which would be a rate above 3% and even close to 4% at the beginning of 2023.
“We think this action, this very aggressive stance against inflation, will actually cause a recession,” Peterson said, “probably the start of a real recession that the NBER would agree is one, probably starting in fourth quarter of this year.”
Fed Chairman Jerome Powell said the economy had not yet entered a recession at his last press conference on Wednesday. “There are just too many sectors of the economy that are doing well,” Powell added.
Ethan is a staff writer for Yahoo Finance.
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