Did the Fed Just Hike Rates for the Last Time? The Reverberations Are Roiling the Housing Market

Buying a home likely won’t become more affordable this summer.

The Federal Reserve hiked its interest rates again on Wednesday as it soldiered on to bring down inflation. While mortgage rates are separate from the Fed’s rates, lately they have moved in the same upward direction. That means mortgage rates are expected to remain high until the Fed’s increases are over, much to the dismay of homebuyers and sellers.

“Mortgage rates are still going to stay relevantly elevated,” says Realtor.com® Chief Economist Danielle Hale. “It’s certainly possible that rates could exceed 7%, but our expectation is they will begin to decline very gradually in the second half of the year as inflation goes down.”

Rates averaged 7.04% for 30-year fixed-rate loans as of Tuesday afternoon, according to Mortgage News Daily.

Despite raising its rates to a 22-year high, Fed officials have indicated there could be another rate bump this year if inflation and the overall economy don’t continue to cool.

“Even with 10 previous interest rate hikes coming at the fastest pace in 40 years, the economy has been resilient and the labor market surprisingly robust,” Bankrate Chief Financial Analyst Greg McBride said in a statement.

The Fed’s goal is to bring inflation down to 2%. And while the Fed has made progress curbing inflation from a high of 9.1% in June of last year, inflation had fallen only to 3% year over year by this June. Meanwhile, the economy has remained strong and unemployment low.

“They are far more likely to freak out after a high inflation number and far less likely to relax after a low inflation number,” says Hale. “The Fed would rather err on the side of being cautious, not giving inflation any room to reignite.”

She anticipates mortgage rates will be just above 6% by year’s end.

That would be a boon to buyers, who are being priced out of the market. It would also likely coax some would-be sellers off of the sidelines. Many homeowners have been reluctant to trade up or down or relocate and give up the 3% mortgage rates they secured during the COVID-19 pandemic. If they buy new homes with a new mortgage, they will be saddled with higher rates and heftier monthly payments.

Another complicating factor is that higher mortgage rates haven’t pushed down home prices. The reason for the stubbornly high price tags is the housing shortage. There are still more people looking for homes than there are homes available. That’s leading to bidding wars for many homes and the continuation of offers over the asking price.

It’s also responsible for the median home list price slipping just 0.9% in June, to $445,000 nationally.

As long as the Fed is finished hiking rates or does only one more increase this year, mortgage rates are likely to fall, says mortgage lender Shmuel Shayowitz, president of Approved Funding in River Edge, NJ.

“I would not be surprised if, by the end of the year, we see [mortgage] rates in the high 5%,” says Shayowitz.

Buyers who can still afford to purchase a home have largely accepted the higher rates. Many plan to refinance once rates drop.

However, many are choosing smaller and less expensive homes, more affordable areas, or properties that don’t have everything they wanted to make the math work.

“I don’t think this rate hike, and if there will be one in September, will have any impact on buyer behavior,” says Shayowitz. “Those who need to buy and those who are able to buy will still move forward.”

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