Feeling The Pain: Fed’s Hikes Affect Housing Market


Mortgage rates are hovering around 7% as the summer winds down and with potential homebuyers facing high monthly payments for the few properties for sale, people are wondering when the Federal Reserve will loosen its grip on monetary policy so the housing market can free up again.

Last month, Chairman Jerome Powell announced the key interest rate would be lifted to 5.25% to 5.5% — the upper figure representing a level not seen since 2001, according to the Associated Press. Powell said that they don’t expect to reach their goal of 2% inflation until 2025, and they do not intend to cut rates until next year.

“The Fed’s rate hikes attempt to combat inflation, increasing mortgage interest rates. While the Fed doesn’t determine the mortgage interest rates, the recent one-quarter rate increase can affect prospective borrowers,” Allyson Waddell, agent success manager at RealtyHop.com, told The Mortgage Note.

Mortgage interest rates include multiple factors and mortgage lenders raise them to compensate for their increased cost of borrowing money, she added. That drives up prices for homebuyers.

“In an already unaffordable market with low inventory, any increase in mortgage interest rates decreases a potential buyer’s spending power,” Waddell said.

Waddell said the Fed could have acted similarly to their previous meeting and not raised rates. “However, this may have only temporarily delayed the effects of future rate hikes. Maintaining previous rates likely wouldn’t have made buying a home significantly more affordable for the average buyer.”

Consumers are overwhelmingly pessimistic about the current housing market.

Respondents to a Fannie Mae survey cited high home prices and mortgage rates as the reason for their outlook. The net share of people who expect home prices to increase in the next year rose by 6% month-over-month and has been on the rise since March.

Seth Bellas, branch manager for The Bellas Group of Churchill Mortgage, said home values “have skyrocketed over the past several years, and with the average 30-year fixed-rate mortgage more than doubling from this time in 2021, many first-time buyers are finding it difficult to purchase their first home.”

Bellas told The Mortgage Note that people who may want to move but purchased or refinanced when rates were historically low during the pandemic are also affected.

“The low rate of their current loan acts as a set of golden handcuffs that causes many families to choose to stay in their home and wait for rates to drop before considering moving,” Bellas said.

If Bellas had anything to say about Fed strategy, he noted it “could have chosen to not hike rates. Depending on who you follow, you can come to different conclusions about the effectiveness of the Fed’s rate hike strategy.”

He feels many of the issues around inflation could have been circumvented “by not printing so much cash and having the Fed buy so many mortgage-backed securities, particularly in 2020 but even into 2022.”

Has the Fed gone too far?

Meg Hetzel, independent consultant and real estate agent at Welcome Home Realty Group, told The Mortgage Note that Powell acknowledged the Fed’s monetary policy is “hurting the housing market and I agree.”

“I believe that, economically speaking, increasing the rates was one of the only ways to course correct. That being said, the aggressive pace at which the Fed has done so has left little clarity on the long-term effects the hikes will have on certain industries,” said Hetzel.

Patrick Horan, Mercatus Center research fellow at George Mason University, says the Fed’s interest rate hikes have helped ‘cool’ the once red-hot housing market which will be remembered for a different kind of heartbreak as bidding wars and cash offers left the average homebuyer behind.

Horan said, “It’s important to remember that these hikes came after the Fed fell behind the curve in 2021, which led to too much demand in the economy. Such excess demand contributed to higher prices throughout the economy, including in housing. The Fed is trying to correct those earlier errors.”

Horan said the Fed could have taken action sooner and maybe today’s problems would have been avoided.

“Instead of waiting until March 2022 to raise its interest rate target, the Fed should have begun gradually raising its interest rate target in either summer or fall 2021. If the Fed had done this, it could have more easily mitigated inflation without having to resort to such very large interest rate hikes last year,” he said.

It is being speculated that once interest rates drop, a number of buyers will jump into the housing market, causing another surge in prices

Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors, told The Mortgage Note this is reflected in what she is seeing.

“Buyers who were priced out of the housing market with rates at nearly 7% will be able to purchase. Due to limited housing inventory, the housing market may see a rebound in multiple offers, which will put upward demand on housing prices,” said Lautz.

She said a significant portion of homes are already selling at above the asking price.

The Federal Open Market Committee’s next meeting is September 19 and 20.

Writer Erin Flynn Jay contributed to this article.

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