Fed’s latest hike will push up mortgage rates

The Federal Reserve’s latest interest rate hike Wednesday of 0.75 percentage points is expected to intensify pressure on the housing market while pushing up mortgage rates that already have reached nearly 20-year highs.

The interest hike announced Wednesday is the latest effort by the Fed to slow inflation by raising the cost of doing business. The interest rate hikes are also making new mortgages much more expensive, cooling the housing market while potentially raising the cost of rent.

While announcing the new interest rate hikes on Wednesday, Fed Chairman Jerome Powell said that the economy is still far away from the point at which he expects the price of rent to come down.

“There will come a point at which rent inflation will start to come down, but that point is well out from where we are now. We’re well aware of that,” Powell said, referring to rent increases as measured by the consumer price index and personal consumption expenditure index.

The Mortgage Bankers Association (MBA) reacted to the Fed’s announcement by noting that peak mortgage rates have yet to come into view.

“The combination of elevated mortgage rates and steep home-price growth over the past few years has greatly reduced affordability,” MBA economist Mike Fratantoni said in a statement.

More hopefully, Fratantoni said, “the volatility seen in mortgage rates should subside” once inflation begins to slow.

The Fed indicated at its latest meetings, however, that it is likely to continue to raise rates to a top line higher than the 4.6 percent it had suggested was coming in September.

Powell said that “at some point” it would be appropriate to slow the pace at which the Fed is increasing rates while hinting the final number would be above 4.6 percent.

Powell added that the Fed recognizes how significant its rate hikes are on the housing market, which has been experiencing surging rents amid a national shortage of housing units estimated in the millions of homes.

“Housing is significantly affected by these higher rates, which are really back where they were before the global financial crisis. They’re not historically high, but they’re much higher than they’ve been,” Powell said during a press conference on Wednesday. “We do understand that that’s really where a very big effect of our policies is.”

White House spokesperson Karine Jean-Pierre said that higher interest rates should slow demand for housing and bring housing inflation down.

“The Fed actions help bring inflation down. And as mortgage rates increase, demand in the housing market should continue to cool and inventory should increase which should have the effect of lowering housing inflation,” she said in a press conference Wednesday.

Before the Fed’s latest announcement, mortgage rates did dip slightly, according to data released Wednesday by the Mortgage Bankers Association. The MBA’s weekly survey showed the 30-year fixed-rate mortgage rate falling to 7.06 percent, down from 7.16 a week earlier, and applications decreasing for the sixth straight month.

Low-income housing advocates say the White House should be more vocal on the need to reduce the cost of rent.

“As of now, the Biden administration is dangerously silent on the single biggest line item in Americans’ budgets: their rent,” Tara Raghuveer, director of a tenant’s association in Kansas City and a low-income housing advocate, said in a statement to The Hill.

Effective mortgage rates have shot up to 7.08 percent from 4.16 percent in March when the Fed first began its rate hikes. They’ve more than doubled from their pandemic low point of 2.65 percent.

This has led to a significant decline in refinance activity as potential sellers are reluctant to give up their low rates. 

“With most homeowners locked into significantly lower rates, refinance applications continued to run more than 80 percent below last year’s pace, while the refinance share of applications was 28.6 percent – the fifth straight week below 30 percent,” MBA Vice President and Deputy Chief Economist Joel Kan said in a statement.

High rates have also encouraged borrowers to pursue slightly riskier adjustable rate mortgages for a lower rate. The average rate for a 5-year adjustable rate mortgages decreased to 5.79 percent last week from 5.86 percent a week earlier.

Rising rates have already led to dramatic declines in new home sales and a record price slowdown, further limiting Americans’ ability to secure affordable housing.

Home prices slowed at a record pace in September, falling by 2.6 percent, according to the S&P CoreLogic Case-Shiller Index released last month.

Sky-high rates have also led to a sharp decline in the number of homes under contract. The forward-looking market indicator fell for the fourth consecutive month in September, dropping by 10.9 percent. 

Meanwhile, sales of new single-family homes in the same month fell by 10.9 percent to a seasonally adjusted annual rate of 603,000 units, according to Census Bureau data.

Yet the latest rate hike may not drastically change growing interest rates, as they are already included in many predictions, Lawrence Yun, chief economist for the National Association of Realtors said in a statement. 

“Even with the Federal Reserve raising its short-term fed funds rate by another large amount, longer-term interest rates look to move only slightly. The mortgage market has already priced in the latest Fed move,” Yun said.