Mortgage rates at 7% as the Fed fights inflation
“We don’t crash; we are stabilizing,” Enrico-Crum said. “We’re just trying to figure out what that price point is. That’s what everyone is trying to figure out.”
Why is the Fed raising interest rates?
The long-awaited change – from a white-hot housing market to something more normal – is unfolding across the country as mortgage rates hit 20-year highs, pushed in part by Reserve measures federal government to slow down the economy and bring down inflation. The average rate on a 30-year fixed mortgage, the most popular home loan product, has more than doubled in a year, and many lenders are quoting over 7% for these loans. Data to be released Thursday morning by Freddie Mac could also show mortgage rates rising above 7% for the first time since April 2002. A year ago, they were 3.01%.
The housing market has cooled since the Fed began raising rates this spring. And it clearly cools faster as rates rise. U.S. home prices fell in July from June, marking the first month-over-month decline since January 2019, according to the closely watched S&P CoreLogic Case-Shiller National Home Price Index. . In August, sales of existing homes fell for the seventh consecutive month to the lowest level since the first pandemic closings, according to the National Association of Realtors. Sales fell by 0.4% from July to August and by 19.9% compared to 2021. There are even early signs of a drop in rental prices.
The Fed raises interest rates by 0.75 points to fight inflation
“It’s really important to see how much more vulnerable a sector like housing, which has exploded coming out of the pandemic, is,” said Diane Swonk, chief economist at KPMG. “It was not only supported by low rates, but it was also supported by working from home and other shifts. Some of these changes won’t go away, but the low rates are. »
Last week, the Federal Reserve raised rates another 0.75 percentage points, and the bank is expected to raise rates twice more before the end of the year. The Fed does not specifically set mortgage rates, but changes in its benchmark rate – known as the federal funds rate – ripples through the economy and influences all manner of lending. Since the spring, the Fed has noted that rates from near zero to between 3% and 3.25%, sending mortgage rates on a rapid upward streak.
And they might not stop there, especially since the Fed still has a long way to go in the fight against inflation. Consumer prices rose unexpectedly in August, with rents and food remaining the main constraints. Stock markets have been crashing for weeks as policymakers make it clear they are nowhere near the kind of progress they would need to cut their interest rate campaign, and as central banks around the world raise rates at the same time.
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Many economists are predicting a recession later this year or early 2023, especially since rate hikes operate with a lag and may not fully grip the economy for months. The housing market reacts very tightly to any movement in interest rates. But many other sectors of the economy do not.
Asked this week about fears that the central bank won’t have enough time to assess the impact of rate hikes, Charles Evans, president of the Federal Reserve Bank of Chicago, said, “Well, I’m a little nervous about that.
“There are delays in monetary policy and we acted quickly,” Evans said. “We’ve done three consecutive 75 basis point increases, and there’s talk of doing more to get to that 4.25% to 4.5% by the end of the year. You don’t leave a lot time to watch each monthly release.
Fed rate hikes are designed to cool demand, and in the housing market that means weeding out buyers who, until just a few months ago, were jostling for a handful of homes, sending prices to record levels. Fed officials hope their policies can slow the housing market without causing a total crash. Demand for mortgages fell as quickly as rates rose. Total demand volume has fallen six of the past seven weeks, according to the Mortgage Bankers Association. Refinances are down 84% from where they were a year ago.
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“The reality I share with my clients is that people were buying houses when rates were at 7% 20 years ago, and they will continue to buy houses when it’s higher or lower,” Geetesh Kapoor said. , production branch manager at Fairway. Independent mortgage company. “If the goal is to buy a house, you can always refinance it later when rates go down.”
But monetary policy cannot solve the other major problem in the housing market: not enough houses. Low inventories continue to weigh on the housing market. The housing shortage is exacerbated by homeowners reluctant to sell due to low mortgage rates. According to Black Knight, 90% of borrowers have a mortgage rate below 5% and two-thirds have one below 4%.
“Many potential sellers are locked into low rates that make switching to a much more expensive mortgage a difficult transition, keeping inventories low,” said Nicole Bachaud, senior economist at Zillow. “This rebalancing gives more power to some wealthy buyers who can afford to stay active in the selling market, with more time to make crucial decisions, less competition and more bargaining power than at any time in the past. recent years. years.”
Estimates of the country’s housing supply deficit vary widely from 1.5 million to 5 million. But it is clear that house prices and rents will remain high until there is more housing for people.
Rate hikes make closing this supply gap even more difficult. Phil Crone, executive director of the Dallas Builders Association, said the rise in interest rates followed ongoing supply chain shortages on everything from windows to garage doors. But Crone hopes the Fed can manage to raise rates and rein in inflation without causing other consequences, like forcing companies to lay off and further worsening labor shortages in the construction sector — or dumping the housing market completely.
Demand for new homes in North Texas is still strong, especially with the region’s strong job growth, Crone said. There is also a generational component: many millennials are de facto afraid of high interest rates, but the generation of Crone’s parents is used to much higher mortgage costs. If inflation goes down in the future and rates find common ground, the market will be much more sustainable.
“Right now it’s just a matter of going from this hyper-acceleration to finding our feet again,” Crone said, “which may take like six bumpy months until we find that.”