Many homebuyers are on edge after the U.S. Federal Reserve announced it was hiking interest rates again. However, they might not need to worry.
On Wednesday, the Fed announced it was raising its short-term rates by 0.25%, in its latest maneuver in its war against high inflation. Mortgage interest rates, which are separate from the Fed’s rates, have been climbing since the Fed began jacking up its own rates about a year ago. That’s battered the previously hot housing market, creating something of a standoff between buyers and sellers.
This latest Fed hike, however, might not lead to a rise in mortgage rates. Instead, mortgage rates could wind up steadying—or even dipping—in the weeks ahead. Rates averaged 6.49% on Wednesday afternoon for 30-year fixed-rate loans, according to Mortgage News Daily. That was down a little from 6.58% the previous day.
Many believe this could be the Fed’s last interest rate hike for some time. The Fed’s goal was to batter the economy just enough to bring inflation down, without pushing the nation into a full-fledged recession. Inflation is now coming off of last year’s highs, unemployment appears to be rising, and the higher rates have created a banking crisis of which First Republic Bank is the latest victim.
“Mortgage rates are sensitive to the inflation outlook,” Holden Lewis, a home and mortgage expert at NerdWallet, said in a statement. “When investors believe inflation will drop over the next few years, mortgage rates drop, too. This Fed hike should help reduce the inflation rate and consequently mortgage rates.”
Lower mortgage rates would be a boon for homebuyers who can’t afford to purchase properties at today’s lofty prices if they’re taking out loans with higher mortgage rates. It could also result in more homes going up for sale, easing the housing shortage.
Many sellers have been loath to give up their record-low mortgage rates to purchase their next property, which would require a higher mortgage rate if they’re taking out a loan. Lower rates could entice them off of the sidelines.
“The housing market will see sales at a relatively low level with more activity when rates dip and less activity when they go up,” says Realtor.com® Chief Economist Danielle Hale. “Both buyers and sellers are very interest-rate-sensitive right now.”
Buyers shouldn’t get their hopes up that rates will drop back down to COVID-19 pandemic levels, when they dipped below 3% for 30-year fixed-rate loans. But they could settle below 6% within the next year or so, says Robert Dietz, chief economist of the National Association of Home Builders.
“We’re past peak rates,” says Dietz. He doesn’t anticipate that rates will top 7% again, like they did for 30-year fixed-rate loans in late 2022.
The stress in the regional banks might act as an equivalent to higher rates. Going forward, lenders are expected to be more cautious in making loans to businesses, which could slow down the economy. That is the same goal of the Fed with its rate increases.
There are no guarantees, however, that the Fed will stop raising its rates. If inflation doesn’t continue cooling or unemployment is less than what the Fed would like to see, it could raise its rates again. Mortgage rates could follow.
However, if the country enters into a recession with higher than anticipated job losses, the Fed is likely to cut its rates to stimulate the economy. That would likely lead to lower mortgage rates.
“We’re teetering on the edge of a turning point,” says Hale. “It’s hard to forecast too far ahead. Any new piece of new information changes the calculus.”