Mortgage Rates Increase as Fed Prepares to Act

Soaring mortgage rates are starting to make homeownership less affordable, but demand remains strong as buyers rush to close before the Fed raises rates.

The average 30-year mortgage rate is now 3.92 percent, up from 3.69 percent the previous week. Mortgage rates were last higher in May 2019, a year before the pandemic hit and the Fed slashed rates to near-zero.

The National Association of Realtors disclosed Friday that home sales increased 6.7% from December to a seasonally adjusted annual rate of 6.5 million. 

Panic Buying

According to NAR housing and commercial research executive Gay Cororaton, purchasers are attempting to lock in mortgages first before rates rise further.

The central bank’s upcoming rate hikes will dramatically increase the cost of a mortgage, Cororaton added.

She said mortgage prices could hit 4.5 percent by year’s end, affecting housing affordability. For example, a 1% change in mortgage rates can increase monthly payments by hundreds of dollars.

As per Desmond Lachman of the American Enterprise Institute, mortgage rates closely track the 10-year Treasury yield, which is swayed by Fed policy.

The 10-year Treasury rate fell to 0.5 percent during the pandemic, but has since risen to around two percent, near pre-pandemic levels.

In concept, since the Fed is well behind the curve, they will have to increase interest rates significantly; this means higher mortgage rates, which is not good for the housing market.

The Fed is supposed to boost rates multiple times this year, but how many is unknown.

Notwithstanding the likely rapid pace and magnitude of the hikes, inflation will not fall instantaneously. For those facing higher mortgage rates, this means prices will probably stay persistently high throughout the year.

Rate increases will likely lessen demand because people will be able to purchase fewer houses; the class of people presently racing out to purchase homes will no longer be a thing to consider.

The NAR anticipates after the rate rises, existing-home sales will fall from 6.5 million to under six million. As a result of the high demand and lack of supply of homes, home prices are also rising. 

Real Estate Market to be Hit Hard in 2022

This year’s median home price was $350,300, up 15.4% from last January, the NAR reported Friday. This rate of increase is roughly double the overall increase in consumer prices.

Last month, the number of homes for sale fell to a historic low of 860,000, down 16.5% from last year. The housing market is now at its lowest level in over two decades.

Supply chain issues are delaying new home construction. Across the board, there have been shortfalls in goods and postponements in orders. The construction sector is struggling to keep up with demand while also retaining workers.

In addition to a recession, Lachman told reporters the real estate market could be hit hard in 2022.

He noted in addition to rising house prices, stock prices are also rising; if the Fed keeps increasing interest rates, “those bubbles can burst and that cannot be beneficial to the economy.”

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