When the Fed launched its rate hike campaign last March, the housing market reacted predictably, pushing up mortgage rates and ultimately lowering home prices.
But after 10 rate hikes, the housing market—traditionally one of the most rate-sensitive sectors of the economy—has become unpredictable.
“It’s causing a lot of confusion,” said Orphee Divongay, senior economist at Giro.
The Federal Reserve raised the base interest rate by 5 percentage points This is the first time since March last year in order to reduce the inflation rate, which is at the highest level in 40 years.
If the Fed raises interest rates, so will the interest rates on overnight loans that banks charge to each other. Banks and other financial institutions pass on higher borrowing costs to consumers by charging higher interest rates on mortgages, credit cards, auto loans, and other loans. In theory, consumers will respond by spending less, so businesses won’t be able to raise prices as much as they used to.
Until the Fed announced its first rate hike on March 16, 2022, the average 30-year fixed mortgage rate had not risen above 4% since May 2019, according to Freddie Mac data. Interest rates began to rise in anticipation of the Fed’s decision to raise rates, rising further to 4.42% shortly after the first rate hike. Then, despite four subsequent rate hikes, mortgage rates continued to rise in line with the Fed’s rate hikes until November, peaking at 7.08%.
Mortgage interest rates are on the rise, After weeks of decline. In the week ending July 6, mortgage rates hit 6.81%, the highest level so far this year, Freddie Mac said. report on thursday.
But the median resale home price in May was $396,100, down 3.1% from a year earlier, according to data from the National Association of Realtors. However, the median price rose 2.6% in the same month, marking the fourth straight month of gains. The median price for new homes in May was $416,300. That was down 7.6% from May last year, but up 3.5% on a month-to-month basis, according to U.S. Census Bureau data.
Wells Fargo senior economist Charles Dougherty said the Fed’s monetary policy is one of many factors affecting mortgage rates.
Another big factor is the 10-year Treasury yield, which tends to act as a leader in mortgage rates. But in recent months, the gap between 10-year Treasury rates and 30-year fixed mortgage rates has widened.
This is the product of an uncertain economic outlook, Mr. Doherty said. Inflation is still above the Fed’s 2% target, which means the Fed is likely to raise rates further. But the Fed could inadvertently trigger a recession if it doesn’t fully grasp the economic impact of another rate hike, he said.
“Long-term rates not only predict the Fed’s next move, but the potential trajectory of rates over the next decade,” said Len Kiefer, deputy chief economist at Freddie Mac. “Mortgage rates may react to the Fed’s next rate move, but that may seem counter-factual.”
“For example, if the market concludes that future rate hikes are unlikely, it could put downward pressure on mortgage rates. It’s possible,” Kiefer told CNN.
In theory, when mortgage rates rise, home prices should fall as home ownership costs rise and demand declines. But that has not happened.
Kiefer said that was partly because higher mortgage rates after the Fed hiked created a large lock-in effect.
At the beginning of the pandemic, the Fed cut interest rates to near zero in hopes of stimulating the U.S. economy as businesses closed and workers stayed home to prevent the spread of the new coronavirus. Such low interest rates have enabled homeowners and homebuyers to refinance or purchase at his low interest rate of 2%.
Everything changed when mortgage rates approached 7%. Selling could mean giving up low mortgage rates that could double.
“Many existing homeowners find it difficult to give up mortgages below 4% and replace them with homes above 6%,” says Kiefer. This led to a decline in housing inventory.
And with many homes still listing above pre-pandemic prices, homeowners have little incentive to sell.
“For the time being, supply is likely to stall,” Mr. Doherty said.
Housing inventory, or the number of active home listings, is down a third from pre-pandemic levels. As of June, approximately 614,000 existing About 928,000 homes were listed in February 2020, according to Realtor.com data.
In many ways, Divongay said the housing market is still recovering from the Great Recession that caused nearly a decade of sluggish new home construction. When mortgages dipped below 3% in 2020, homebuilders began to recover, but not fast enough to deal with the pandemic surge in demand.
Zillow’s Divongi told CNN that housing inventory is likely to decline further due to “lower property inflows coupled with spring homebuying demand.” Moreover, he added, demand for housing remains high as the labor market remains very strong and workers’ incomes continue to rise above pre-pandemic levels.
“This speaks to the heart of why the housing market looks a little strange right now,” Divongay said.