To curb inflation, the Federal Reserve increased its short-term rate by a quarter percentage point. Indirectly, this means that the Fed is putting a ceiling on home prices. It’s paradoxical that the Fed would do this when trying to control inflation.
Federal Open Market Committee of the central bank raised federal funds rates to an estimated range between 5.25% and 5.5%. Mortgage rates were already higher before the Fed met this week in anticipation of the Fed’s rate hike and perhaps another in the autumn.
In an email, Orphe Dvounguy said that investors have anticipated this change and had already factored it into mortgage rates. “We don’t anticipate the mortgage rate to rise any more,” he added.
Is this Fed rate increase needed?
Since March 2022, the Fed has increased short-term rates by 5.25 percentage point to slow down inflation. Central bank made some progress. The consumer price index core fell from 6.6% in September last year to 4.8% this June. The Fed raised its federal funds rate at this meeting because it was still above their target.
What if the increase is unnecessary? The reason there is no need for this increase is that they are increasing the costs of housing by raising rates. Shelter is the largest driver of inflation, says David M. Dworkin.
Dworkin continues: “Right away they need to be patient.” He compares the Fed with a chef who adds too much chili powder. “You can just keep on adding it to your chili.” You’ll eventually be unable to eat this chili. ”
High mortgage rates prevent homes from being sold
The Fed increases interest rates to make borrowing more costly. Interest payments consume more income for businesses and consumers, leaving less to spend on goods and services. Reduced demand should slow price rises. Inflation has indeed decreased.
The Fed’s rate increases have had an unexpected consequence: home prices aren’t dropping as fast as anticipated. You have to look back at the COVID depression of 2020-2021 to understand this. Many homeowners refinanced at rates lower than 5%. Some homeowners got loans as low as 3 %.
After the Fed raised rates, 30-year mortgages are now around 7%. This is keeping houses off the market. Say your seller’s interest rate is currently 3%. Will he sell to get to 7% %?,”? Carolyn Morganbesser is the assistant vice-president of mortgage originations at Affinity Federal Credit Union. It has branches located in New Jersey and New York.
Prices are rising on some markets due to the low number of houses for sale, particularly in the Northeast. Dworkin then criticized the Fed’s strategy, saying: “You’re not going to get what you want if you continue to drive shelter prices higher by harming production and hampering supply.” ”
Dworkin uses the word “shelter”, because prices of homes are not isolated. Rents are also affected. Rents are on the rise. According to Zillow’s Observed Rent Index, in June the median rent was 4,1% more than a previous year. Like home prices, this represents a slower pace than in the pandemic years, but they still continue to rise.
Your rates could be at their peak
Morganbesser describes the combination of rising interest rates, a shortage of available homes and increasing prices as “the trifecta yuckiness.” This forces many potential buyers to rent another year even though rental rates in New York, New Jersey and other states are equivalent to mortgage payments. ”
Divounguy noted that the recent quarter-point Fed increase will not, on its own, affect home prices. However, he did note that the price increases of 2020-2021 are gone. In a few short months, mortgage rates could be more palatable.
What’s important is the next step: will they stop raising rates afterward, and wait for inflation numbers to come out? Divounguy stated. If so, the rise in home loan rates for buyers could be at its peak and soon to start declining. Mortgage rates that are lower should help to encourage both buyers and sellers into the market. ”