Today, the Federal Reserve is anticipated to hike interest rates for the fourth time this year. The Fed rate hike has been a point of focus for many investors due to the breadth of consequences resulting from the aggressive monetary tightening. This includes the likes of mortgage rates, which have climbed in excess of interest rates through the first three rate hikes. So, what does today’s rate hike mean for mortgages?
Well, depending on the severity of the hike, 30-year fixed mortgage rates will likely continue to climb. Mortgages have historically closely tracked 10-year Treasuries, which have risen alongside borrowing rates this year. In fact, the 10-year hit a three-year high after the Fed’s March 50 basis point rate hike. Expectedly, mortgages have followed suit.
Currently, the 30-year fixed-rate mortgages are trending around 6%, its highest level in more than a decade. As interest rates have climbed from near zero to 1.5% this year, home loans have managed to grow even faster. This is likely a consequence of the Fed’s contractionary policy, including its reduced supply of mortgage-backed securities on its balance sheet. Looking ahead to the Fed’s announcement today, the severity of the hike may strongly affect the cascading impact on mortgages.
Many analysts are expecting the Fed to push a 75 or 100 basis point hike this afternoon, which will lift interest rates from 1.5% to more than 2%. It’s a hefty jump, reflecting the drastic nature of the inflation showcased in last month’s Consumer Price Index (CPI) report. Indeed, the June CPI showed prices rose 9.1% from the same time last year, the largest change since the 1980s.
What Does the Fed Rate Hike Mean for Mortgage Rates and Home Prices?
The Fed has repeatedly iterated its single minded determination in lowering prices. Should the central bank prove too eager in its mission, mortgage rates are liable to soar even higher.
The housing market has been in-flux for much of the year in the face of rising mortgage rates. Even as the cost to borrow soared, home prices have largely continued its upwards climb. The minuscule inventory of homes in the U.S., combined with the pent-up pandemic housing demand has meant that even as home sales have fallen due to mortgage rates, homes still rarely sell for below asking. In fact, in the second quarter of this year, the U.S. Department of Housing and Urban Development (HUD) reported an average home sales prices of $525,000, the highest level ever recorded.
However, many economists believe continued pressure on mortgages will eventually cool housing. Ahead of the Fed’s rate hike this afternoon, Ruben Gonzalez, Chief Economist at Keller Williams, commented on the current trajectory home prices are taking:
The housing market is now slowing down with home sales down 14% in June, and that trend is on pace to continue through July. Home price appreciation has begun to slow and mortgage rates are a primary factor slowing demand for home purchases. Over the next several months, the housing market will be even more in line with pre-pandemic market conditions.
With recession fears continuing to mount, inflation still rearing its ugly head, and lending rates set to soar, housing may be liable to take a long-awaited drop.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.