Fed won’t hike rates until 2023, but it could have an impact on today’s market
In a vote of confidence in the country’s recovering economy, the majority of Federal Reserve members now expect rates to hike twice in 2023. And while this skewed monetary projection may sound a long way off, it could have a real impact on today’s overheated housing market.
In response to the news, mortgage rates may rise somewhat in response. This could cause the scorching hot and extremely competitive real estate market to soften just a touch.
The forecasts come from a meeting of the Federal Open Market Committee on Tuesday and Wednesday.
“With [housing] Prices as high as they are, higher mortgage rates will make it harder to afford homes, ”says Realtor.com® Chief Economist Danielle Hale.
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The equation: If fewer people have the means to shop, it could ease the pressure on the market. Less competition could lead to less bidding warfare and overwhelming bids about price.
Hale expects mortgage rates on a 30-year fixed rate loan to rise just over 3% over the next several weeks. Freddie Mac said interest rates averaged 2.96% for the week ending June 10.
If the Fed hikes rates in 2023, Hale expects rates could rise to the mid-range of 3% or even up to 4%.
While this may not sound like a huge increase, even a fraction of a percentage point can have a significant impact on a buyer’s bottom line. A single percentage point can add more than $ 100 to a homeowner’s monthly payment and tens of thousands of dollars over the life of a 30-year loan, depending on the interest rate and size of the mortgage.
This could further slow the market down as more potential buyers could simply be priced out.
Mortgage rates are usually influenced by the Federal Reserve’s short-term interest rates. However, they are more aligned with 10-year US Treasuries.
That’s because lenders typically pool the mortgages they have taken out and sell those mortgage-backed securities on the secondary mortgage market. This frees up cash that they can use to extend new loans. Investors see government bonds and mortgage bonds as safer and less lucrative investments than the stock market. When the economy weakens, these bonds become more attractive. If it’s stronger, or if inflation is stronger, as it is now, investors are not as interested as bonds are worth less when inflation is rising rapidly.
Mortgage rates usually move in the opposite direction of bond prices. If the economy improves enough for the Fed to raise interest rates, investors will be less tempted to put money in bonds. That means mortgage rates will go up, but probably not by much – at least for now.
“The people in the Federal Reserve believe that the economy will grow faster and get stronger,” says Hale. They also expect inflation to stay high throughout the year before it settles down.
“We know the economy is recovering remarkably well,” says Hale. “We know that the labor market is recovering remarkably well. There is still room for improvement and many people are unemployed. But considering where we were a year ago, the progress has been pretty phenomenal. “