The Federal Reserve’s move to raise its benchmark rate by three-quarters of a percentage point—the largest increase since 1994—could put more upward pressure on near-6% mortgage rates and sideline more home buyers, says NAR Chief Economist Lawrence Yun.

The Federal Reserve unleashed another hike to its short-term benchmark rate Wednesday. The increase, the Fed’s largest since 1994, likely will have an impact on the housing market, economists say. The Fed’s key rate often influences mortgage rates, though it doesn’t directly affect them. Rates are moving at a much faster clip than most housing analysts forecast.

On Wednesday, the central bank’s Federal Open Market Committee voted to increase its benchmark funds rate by three-quarters of a percentage point to help tame inflation, which is at a 40-year high. Banks use the Fed’s rate as a benchmark for what they charge one another for short-term borrowing. The Fed’s latest hike sets a “big increase in interest rates and means several more rounds of rate hikes are on the way in upcoming months,” says Lawrence Yun, chief economist of the National Association of REALTORS®.

So far this year, the short-term Fed funds rate has jumped by 175 basis points. The 30-year fixed-rate mortgage has jumped even more—by nearly 300 basis points. For a $300,000 mortgage, the monthly payment has increased from $1,265 in December to $1,800 today, Yun says.

“That’s painful and, consequently, will shrink the buyer pool,” Yun says. “Home sales have recently been trending down toward 2019 figures. Sales could fall even further, with some inventory sitting on the market for more than a month like in pre-pandemic days. Pricing a listed home properly will, therefore, be the key to attracting buyers.” Mortgage rates will stabilize when consumer price inflation starts to fall, Yun adds.

Rising Mortgage Rates

Last week, the 30-year fixed-rate mortgage averaged 5.23%, according to Freddie Mac. A year ago, rates averaged 2.96%. By some measures, mortgage rates were just shy of 6%—at 5.99%—on Wednesday, according to Bankrate.com’s national survey. “Consumers haven’t seen mortgage rates above 6% since 2008,” Greg Schwartz, CEO and founder of mortgage lender Tomo, told Bankrate.com. “The pace of this move is what’s most concerning, as consumers’ buying power evaporated quicker than any time in recent memory. Further, volatility in rates may not decrease anytime soon either.”

Ali Wolf, chief economist at Zonda, offers an example of the impact: Affording a $316,000 home with a mortgage rate of 6% is about equal to paying for a $450,000 home with a 3% rate.

More aspiring home buyers are getting priced out. In response, mortgage applications, a gauge of homebuying demand, have been falling by double-digits. “Mortgage rates going forward will continue to be responsive to changes in expectations around the Fed’s policy path as well as inflation expectations,” says Ruben Gonzalez, chief economist for Keller Williams. “The housing market is still extremely tight, with inventory levels remaining near historic lows, leaving room for the market to absorb falling demand.”

The Fed committee hopes its more aggressive approach will help lessen inflation. “Clearly, today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common,” Fed Chairman Jerome Powell said at a news conference Wednesday. Still, Powell said he expected the Fed’s July meeting to see another increase of 50 or 75 basis points, but he said decisions will be made “meeting by meeting.”

Nevertheless, the committee still appeared optimistic about the economy. “Overall economic activity appears to have picked up after edging down in the first quarter,” the committee said in a statement. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply-and-demand imbalances related to the pandemic, higher energy prices and broader price pressures.” The committee is forecasting inflation to move significantly lower in 2023.

©National Association of REALTORS®
Reprinted with permission

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Borrowing costs have climbed to their highest level since 2008, sending shock waves through the housing market.

Mortgage rates have climbed to their highest level since 2008, pinching home buyers’ budgets. The 30-year fixed-rate mortgage averaged 5.78% this week, way above its 2.93% average just one year ago, Freddie Mac reports. The Federal Reserve’s decision Wednesday to raise its key benchmark rate by the highest amount in 28 years sent shock waves through financial markets, including adding further pressure on mortgage rates.

“These rising mortgage rates hurt affordability and decrease the purchasing power of many buyers,” Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, wrote on the association’s blog. “In addition to increasing the amount buyers will pay to borrow for their mortgage, higher interest rates lower their purchasing power since a larger portion of their monthly payment will be put toward interest.”

This means more buyers must readjust their home-shopping budgets, as the impact of higher rates translates to a 25% drop in house hunters’ purchasing power since the beginning of the year. For example, a typical buyer could afford a $360,000 home with a $1,400 monthly mortgage payment at the beginning of the year. Now, with near-6% mortgage rates, a $1,400 monthly payment translates to a $270,000 home.

Where Do Rates Go From Here?

This week’s 5.78% average for the 30-year fixed-rate mortgage is up from 5.23% last week. Every bit of that bump is being felt by home buyers, economists say. For example, a $300,000 loan with a rate of 5.23% would cost a borrower about $1,653 per month (excluding taxes and insurance). That same loan at this week’s 5.78% average would cost $1,756—an extra $1,236 a year, says Jacob Channel, LendingTree’s senior economist.

The latest increase in mortgage rates has largely been attributed to the Fed’s hike of 75 basis points to its key benchmark rate. “It’s possible that this large increase could be somewhat of an over-correction on the part of lenders, and, as a result, it may fall somewhat over the coming weeks as lenders better adjust to the current high-inflation environment,” Channel says. “Mortgage rates have already risen considerably higher and faster than what most predicted they would at the start of the year—and, as evidenced by today’s latest figures, lenders have shown a willingness to continue to raise rates, even as homebuyer demand falls.”

Mortgage applications for home purchases—viewed as a gauge of future homebuying activity—are down 16% year over year, according to the Mortgage Bankers Association.

Hikes Across the Board

Freddie Mac reports the following national averages for mortgage rates for the week ending June 16:

• 30-year fixed-rate mortgages: averaged 5.78%, with an average 0.9 point, rising from last week’s 5.23% average. A year ago, 30-year rates averaged 2.93%.
• 15-year fixed-rate mortgages: averaged 4.81%, with an average 0.9 point, increasing from last week’s 4.38% average. A year ago, 15-year rates averaged 2.24%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.33%, with an average 0.3 point, rising from last week’s 4.12% average. A. year ago, 5-year ARMs averaged 2.52%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage.

©National Association of REALTORS®
Reprinted with permission

NAR economist says homebuying costs have increased $800 every month so far this year.

Mortgage rates inched closer to 6% this week. The 30-year fixed-rate mortgage averaged 5.81%, up modestly from 5.78% last week, according to Freddie Mac. Borrowing costs are mounting higher and higher for potential home buyers, who now find themselves squeezed both financially and by low inventory.

“Since the beginning of the year, home buying has cost about $800 more every month,” Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the Economists’ Outlook blog. “These higher mortgage rates hurt affordability, and middle-income home buyers can afford to buy fewer homes. Even though inventory has increased 13% since January, not all home buyers can afford to buy these additional homes. In fact, in order to be able to afford those homes, it appears that buyers need to earn more than $150,000 per year.”

Still, rising rates are tamping down previously frenzied demand, which may be a positive thing for the market. “The combination of rising rates and high home prices is the likely driver of recent declines in existing-home sales,” says Sam Khater, Freddie Mac’s chief economist. “However, in reality, many potential home buyers are still interested in purchasing a home, keeping the market competitive but leveling off the last two years of red-hot activity.”

Freddie Mac reports the following national averages for mortgage rates for the week ending June 23:

• 30-year fixed-rate mortgages: averaged 5.81% with an average 0.8 point, up from last week’s 5.78%. A year ago, the 30-year fixed-rate mortgage averaged 3.02%.
• 15-year fixed-rate mortgages: averaged 4.92% with an average 0.9 point, up from last week’s 4.81%. A year ago, the 15-year fixed-rate mortgage averaged 2.34%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.41% with an average 0.3 point, up from last week’s 4.33%. A year ago, the five-year ARM averaged 2.53%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage.

©National Association of REALTORS®
Reprinted with permission

The interest rate on the 30-year fixed mortgage fell this week, offering relief to home buyers who are reeling from escalating costs.

The quick rise in mortgage rates over the last few weeks is taking a pause. The 30-year fixed-rate mortgage averaged 5.7% this week, dropping from last week’s 5.81%, according to Freddie Mac. Still, rates remain well above where they were a year ago, when they averaged below 3%. Higher rates have been sending shock waves through the housing market, potentially adding hundreds of dollars to monthly mortgage payments and spooking interested home buyers.

Since the beginning of the year, home buying has cost about $800 more every month, Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, wrote on the association’s blog. The higher mortgage rates have hurt affordability, and fewer middle-income home buyers can now afford to buy homes, Evangelou notes.

“The rapid rise in mortgage rates has finally paused, largely due to the countervailing forces of high inflation and the increasing possibility of an economic recession,” says Sam Khater, Freddie Mac’s chief economist. “This pause in rate activity should help the housing market rebalance from the breakneck growth of a seller’s market to a more normal pace of home price appreciation.”

Freddie Mac reported the following national averages for the week ending June 30:

• 30-year fixed-rate mortgages: averaged 5.7%, with an average 0.9 point, dropping from last week’s 5.81% average. Last year at this time, 30-year rates averaged 2.98%.
• 15-year fixed-rate mortgages: averaged 4.83%, with an average 0.9 point, dropping from last week’s 4.92% average. A year ago, 15-year rates averaged 2.26%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.5% this week, with an average 0.3 point, rising from last week’s 4.41% average. A year ago, 5-year ARMs averaged 2.54%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

Mortgage rates are dropping as concerns mount over a possible economic recession.

Mortgage rates are falling—at least for now—after posting rapid jumps in June. Over the last two weeks, the 30-year fixed-rate mortgage has dropped by one-half of a percentage point. Home buying is about 5% more affordable than a week ago, translating to about $100 less in monthly mortgage payments, economists at the National Association of REALTORS® wrote on the Economists’ Outlook blog.

Rates are dropping as concerns mount over a possible economic recession, says Sam Khater, Freddie Mac’s chief economist. “While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown,” Khater says.

Freddie Mac reports the following national averages with mortgage rates for the week ending July 7:

• 30-year fixed-rate mortgages: averaged 5.30%, with an average 0.8 point, dropping from last week’s 5.70% average. Last year at this time, 30-year rates averaged 2.90%.
• 15-year fixed-rate mortgages: averaged 4.45%, with an average 0.8 point, dropping from last week’s 4.83% average. A year ago, 15-year rates averaged 2.20%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.19%, with an average 0.4 point, falling from last week’s 4.50% average. A year ago, 5-year ARMs averaged 2.52%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission