Fed Boosts Rates Yet Again, Pushing Down Home Affordability
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The Federal Reserve continued to shout from the rooftops Wednesday that it will do what it takes to get inflation under control. The central bank raised the overnight federal funds rate by 0.75 percentage point, an action that will raise the floor under other interest rates. By making it more expensive to borrow money, the Fed intends to reduce demand for goods and services, which, in turn, is supposed to slow the rate at which prices go up.
The housing market has been hearing the Fed’s message loud and clear for months. Mortgage rates have skyrocketed (and might go up even more), home sales have slowed, prices aren't rising as fast as they once were, and it's getting more expensive to borrow for a home equity line of credit.
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Mortgage rates have climbed all year
Starting in March, the Fed has raised the federal funds rate three percentage points to bring inflation under control. It's the most aggressive rate-hike campaign in decades, because the inflation rate has been at its highest in decades. Mortgage rates have gone up around three percentage points this year, too.
The mortgage market guesses where the Fed is going, then races to get there before the central bank does, so the reaction to today's increase is likely to be muted.
"Rate movements depend on a huge number of factors: the Fed’s actions, their statements, how markets interpret those, geopolitical concerns, the list goes on," Zillow's chief economist, Skylar Olsen, said in an email. "But, generally, earlier signals have already been baked into rates by the time an announcement comes."
Home sales have slowed
When mortgage rates rise, there's a corresponding drop in the amount a home buyer can borrow for a given monthly payment. Some would-be home buyers were priced out of the market altogether during this year's rapid run-up in mortgage rates. The phenomenon showed up as a rapid decline in home sales.
In January, the 30-year mortgage averaged 3.49% and existing homes were sold at an annual rate of 6.49 million, according to the National Association of Realtors. By August, the 30-year mortgage averaged 5.42% — almost two percentage points higher than in January — and existing homes were sold at an annual rate of 4.8 million.
House prices aren't rising as fast
As home sales took a dive, home prices eased up the speed of their ascent.
In January, the median existing home price was 16.7% higher than a year before, according to the National Association of Realtors. By August, that ascent had slowed dramatically: year-over-year price appreciation had fallen to 7.7%.
"Higher mortgage interest rates are putting affordability pressure on home buyers," Chuck Vander Stelt, a real estate agent in Valparaiso, Indiana, said in an email. "In response, home sellers should expect to be offered less for their home compared to when mortgage rates were lower."
The Fed chief talked rates higher
The Fed can count the slowdown in home prices as a win in its effort to reduce inflation. When a desired rise in mortgage rates was lagging this summer, the Fed's chair gave it a kick in the pants.
It was late August, and mortgage rates were loitering under 6%. That seemingly was lower than Fed Chair Jerome Powell wanted. In an Aug. 26 speech, Powell was brief and direct. He implied the Fed would raise rates enough to tip the economy into recession if that's what it took to bring inflation under control.
"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said in prepared remarks. "These are the unfortunate costs of reducing inflation."
The 30-year mortgage rose more than a quarter of a percentage point in a week. Powell's speech had wrought the desired effect.
HELOC rates will rise
Interest rates on home equity lines of credit, or HELOCs, respond directly to Fed rate moves. Rates on most HELOCs will rise by the same amount as this federal funds rate increase. On a $50,000 outstanding balance, the monthly interest on a HELOC will rise $31.25.
Two more Fed meetings are scheduled this year — in early November and mid-December — and forecasters expect the central bank to raise the federal funds rate in both. HELOC rates would ratchet upward, and mortgage rates would rise in the weeks before each Fed meeting.