Shiller price index

The Fed’s interest rate hike to create less competition in the housing market

As the Federal Reserve announced another 75 basis point interest rate hike on Wednesday, loan officers and loan officers – already well aware of the news – looked ahead, wondering if rates mortgages would rise or fall thereafter.

Even economists are divided on what will happen: some believe that rates have already peaked; others say they will climb until or unless the country’s economy officially enters a recession.

But they do agree on one thing: higher interest rates will suppress housing demand, allowing inventories to rebound and possibly spur reluctant buyers back.

“For consumers, this (interest rate hike) means that unless the economy shows further signs of tipping into recession, mortgage rates are expected to rise, which will dampen housing demand,” he said. said Danielle Hale, chief economist at real estate agent.com

Mortgage rates leading to the Fed’s June rate hike rose above the 6% level as higher-than-expected inflation data sparked volatility in the market, leading to turmoil in rates mortgages. Since the Fed’s interest rate hike of 75 basis points in June, mortgage rates in recent weeks have come closer to 5.5%.

Lawrence Yun, chief economist for the National Association of Estate Agents, does not believe that an increase in interest rates of 75 basis points will have an effect on mortgage rates. The long-term bond market, on which mortgage rates are usually based, “has mostly priced in all future Fed action and may have already peaked with the 10-year Treasury hitting 3.5% at mid-June.” Yun added.

“It is possible that the 30-year fixed mortgage rate will stabilize between 5.5% and 6% for the rest of the year,” Yun said. “Yet mortgage rates are significantly higher today than a year ago, which is why home sales have fallen.”

An executive with the Mortgage Bankers Association (MBA) also believes that mortgage rates may have peaked and could remain stable between 5% and 5.5% until the end of 2022. An improvement from the 6% mark, but still significantly above the 3% level at the start of 2021.

“There is a tug of war in market expectations, between persistently high inflation numbers and the resulting rapid Fed hikes, and the growing risk of a sharp downturn and possible recession,” said Mike Fratantoni, senior vice president and chief economist for the MBA.

If mortgage rates peak, Fratantoni said, “potential buyers who had been scared off by the spike in rates could find their way back into the housing market.”

There were clear consequences from the last peak. New home sales fell more than 8% in June from the previous month and were 17% lower than June 2021, according to the US census and the Department of Housing and Urban Development. Contracts signed to buy existing homes fell more than expected by 8.6% in June compared to May and fell by 20% compared to June 2021, the National Association of Realtors said.

House prices have also increased, although at a slower pace. According to S&P CoreLogic Case-Shiller national house price index.

Yun sees home sales coming back if mortgage rates stabilize near current rates and thinks home sales will hinge on jobs and consumer confidence.

“Job creation continues so far. Therefore, home sales may soon stabilize within a few months and then increase steadily from the beginning of next year,” Yun said.

Hale of Realtor.com said falling demand and rising costs belie some positives for home buyers.

“While the options are more expensive and more expensive to finance, the growing number (of home sales from a year ago) will help the housing market rebalance, giving potential buyers some much-needed refreshment,” Hale said. .

According to Marty Green, director of the mortgage law firm, any increase in availability in inventory deserts would be enough to bring buyers back into the market. Polunsky Beitel Vert.

“The question is whether the slowdown is the result of most consumers simply putting a buying decision on hold while they see where interest rates and home prices stabilize, or whether they should indefinitely delaying a purchase decision due to affordability concerns,” Green said.

Some LOs think the interest rate hike has already been priced into mortgage rates, so they don’t expect extreme volatility like last month.

“There was no major panic (like in June),” said Christian Dicker, head of loans at Currency Mortgage. “I think that’s already a price on the market.”

Dicker suggested that a slowdown in the housing market is good, to some extent, because it means less competition for the buyer – a welcome change after months of increasingly intense bidding wars, in which anything less than an all-cash offer came with inherent uncertainty.

“I’ve had more offers accepted in the past two weeks than in the past two months. They (the buyers) visit four houses and all of them are available. They make one or two offers and they get accepted,” Dicker said.

Affordability remains a challenge, but some buyers “resign themselves to higher rates, knowing they’ll have to pay more if they want the property,” said Coley Carden, vice president of residential lending at Winchester Cooperative Bank.

“As interest rates rise and home price appreciation slows, demand for homes will stabilize,” Carden said.

Although he’s not seeing 20 offers on every property like he has during the pandemic, Carden is still getting inquiries for homes, and even second homes.

“I think what could reduce demand from homebuyers is more of a recession — especially if people have reduced hours and start getting laid off,” he said.