Mortgage rates hit 7 percent as the Fed moves into the sluggish economy

The central bank does not directly determine the costs of the mortgage, but it changes Its policy rate – known as the federal funds rate – ripples through the economy and affects all types of lending. Since March, the Fed has raised interest rates five times, raising the benchmark rate from nearly zero to between 3 percent and 3.25 percent. The central bank is expected to raise interest rates by another 0.75 percentage points next week.

Calculate how much mortgages will cost as interest rates rise

These moves have already had dire consequences for the housing market, and the sudden rise in mortgage rates has prompted some Broader concerns that the Fed is putting pressure on the economy Too much force.

“People can say, ‘Well, you know, a percentage [added] The mortgage rate is still low. “But we’ve had several ratios on the mortgage rate in a short period of time,” said Diane Sonk, chief economist at KPMG. “The rapid pace at which they are raising rates is itself destabilizing.”

The average mortgage rate has risen surprisingly fast. A year ago it was 3.09 per cent. As of late March, the average 30-year fixed-rate mortgage rate was less than 4 percent. The increase from 3.22 percent in January to 7.08 The percent now, a jump of 3.86 percentage points, is the largest increase in one-year rates. The previous record was 3.59 percentage points in 1981.

Prices rose again in September, ensuring further rate hikes

For most of the pandemic, lower rates have sent aspiring homebuyers into the market, competing for the few homes available, driving up prices. But now, with the worry of spending hundreds of extra dollars a month on a mortgage, buyers are holding back, boosting the supply of available homes and helping lower prices overall. This year, when rates were less than 4 percent, a household with a median household income of $71,000 could afford a $448,700 home with a 20 percent down payment. This week, with rates around 7 percent, they were only able to purchase a home for $339,200, according to Realtor.com.

Home prices are dropping at a record pace. The Case-Shiller Home Price Index released earlier this week showed prices were 13 percent higher in August than they were a year ago, down from 15.6 percent the previous month. The difference of 2.6 percentage points between these two months is the largest drop in the history of the index, which first appeared in 1987.

Zillow on Wednesday announced 300 layoffs in several departments, including home loans and service closures, even though the company He said Recruitment is not frozen.

The demand for mortgages has also fallen as fast as interest rates have risen. Total order volume is at its lowest level since 1997, according to the Mortgage Bankers Association. Refinancing is down 86 percent from a year ago, and Mortgage Lenders Nationwide, including major banks, letting employees go as the market slows. Higher interest rates have increased interest in adjustable rate mortgages. ARM’s share of applications was 12.7 percent.

Home builders are also tweaked. Total housing starts fell 8.1 percent to a seasonally adjusted annual rate of 1.44 million units in September, according to a report earlier this month from the US Department of Housing and Urban Development and the US Census Bureau. So far this year, Single-family starts are down 5.6 percent from this point last year.

Construction confidence also declined for the 10th consecutive month in October, falling to its lowest level since 2012, except for the two-month period in spring 2020. When the epidemic started. It’s half the level it was six months ago.

“This will be the first year since 2011 to see a decline in single-family beginnings,” Robert Dietz, chief economist for the National Association of Home Builders, said in a statement. “Given the continuing expectations of higher interest rates due to the actions of the Federal Reserve, 2023 is expected to see a further decline in single-family construction as the housing contraction continues.”

However, the Fed’s tools are limited, and officials routinely cite the housing market as one of the clearest signs that rate hikes are having the intended effect.

Fed Governor Christopher Waller said in Speech This month. “But there is more that needs to be done to bring down inflation in a meaningful and sustained way.”

When Or how an interest rate hike by the Fed will outpace inflation elsewhere in the economy is not yet clear. The price increases are designed to kill demand, but they do nothing to fix supply-side problems, such as oil and gas shortages, affordable apartments or new car chips. In general, consumer prices remain stubbornly high, to rise 8.2 percent in September, compared to the previous year.

Rental costs also rose 7.2 percent last year, and rents It rose 0.8 percent from August to September. Goldman Sachs expected overall housing inflation to peak at 7.5 percent next spring before slowly slowing to less than 6 percent at the end of 2023. This has major implications for Fed policy, because housing costs make up a large part of the A basket of goods is used to measure inflation in an economy.

As the Fed fights inflation, fears are growing that it’s overcorrect

But the housing market slowdown may eventually also drive down rental prices. National rent growth has fallen to its lowest annual pace (7.8 percent) since June 2021, according to Realtor.com. The median rental price in the US posted its second month-on-month decline in eight months in September.

Rising mortgage rates are slowing the market even in places where it has been hot during the pandemic. During 2020 and 2021, sales prices soared in the Hudson Valley, as transplants from New York City and elsewhere demanded the few homes available. But with mortgage rates now rising, the number of available homes has more than doubled in the past three months, jumping from about 150 units to about 380, said Ryan Basten, co-broker at Berkshire Hathaway HomeServices Nutshell Realty.

This is an encouraging sign that the market is returning to some regular releases. But Basten said there is a lot of uncertainty about the future. He’s seen recent jumps in mortgage rates: 5 percent “wasn’t too bad,” he said, and 6 percent were “viable”. But with the Fed preparing to raise interest rates two more times before the end of the year, Basten said he and others in the industry “are wondering if there will be a real pullback in the market.”

“We can only deal with what we’re dealing with right now. I can’t see mortgage rates going up to 10 [percent]. “If they did, that would look like a recession,” Basten said. “eight [percent] bad feeling. Ten percent would be like, “Wow, where do we go from here?” “