Fed rate increase could signal lower mortgage rates ahead
Holden Lewis, NerdWallet
The Federal Reserve raised a key short-term interest rate Wednesday by one-quarter of a percentage point in its quest to stifle inflation. The action might not have much of an effect on mortgage rates in the short term — but it could help to push them lower in the long term.
The overnight federal funds rate will rise by 0.25 percentage points to a range of 4.5% to 4.75%. The prime rate will rise by a quarter of a percentage point to 7.75%. Interest rates tied to the prime rate, including those for home equity lines of credit, will go up by 0.25%, too. But mortgage rates won’t necessarily follow.
Mortgage rates fall along with inflation
Everyone knew weeks ago that the Fed would raise the overnight rate at this meeting. Even so, fixed mortgage rates fell through much of January. It wasn’t a big drop: The 30-year fixed-rate mortgage averaged 6.29% in January, down from 6.38% in December.
But whenever mortgage rates and the federal funds rate move in opposite directions, it serves as a reminder that the Fed influences mortgage rates but doesn’t set them. Mortgage rates are governed by a constellation of market forces.
Lately, mortgage rates have been heavily influenced by inflation. The inflation rate is falling, and that’s the main reason mortgage rates went down in January. The latest consumer price index, from December, showed that overall prices increased 6.5% over the previous 12 months. That’s down from a peak of 9.1% in June.
2% inflation still a stretch goal
The Fed’s goal is to push the inflation rate to 2%, so it has a ways to go. “The Federal Reserve will continue to increase short-term rates to fight inflation, and will ultimately be successful, but it will be early 2024 before inflation reaches their 2% target,” Michael Fratantoni, chief economist for the Mortgage Bankers Association, said in an email.
The Fed’s monetary policy committee meets eight times a year, and this was the eighth rate increase in a row. The central bank took off gently last spring, then mashed the pedal to the metal with four increases of 0.75 percentage points in a row in summer and fall. Now it has throttled back: first with a half-point rise in December and now with this quarter-point rise.
Planes, rates and automobiles
Lorie Logan, president of the Federal Reserve Bank of Dallas, used a different automotive metaphor when explaining the smaller rate hikes: “Now, if you’re on a road trip and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down,” she said in a speech Jan. 18. In her telling, the fog consists of “data and qualitative reports (that) will become even more mixed as the economy slows.”
Fed Governor Christopher J. Waller, in a Jan. 20 speech, went with an aeronautical metaphor while explaining the Fed’s reasoning. “After climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent,” he said.
It’s smart to slow the rate hikes, says Daryl Fairweather, chief economist for real estate brokerage Redfin, “because they don’t want to go too far in the hawkish direction.” That could cause economic growth to stumble, doing more harm than good, she says.
HELOC payments will go up
Home equity lines of credit are a popular way for homeowners to pay for renovations and repairs. The quarter-point rise in HELOC rates will make it more expensive to borrow or repay on funds already drawn. On a $50,000 balance, the monthly interest will rise by $10.42.
Fed rate increase could signal lower mortgage rates ahead
fizkes
Photo Credit: fizkes / Shutterstock
Mortgage interest rates are now more than double what they were in early 2021. As a result, rising home prices have started to slow down, but not by enough to offset the increased borrowing costs caused by higher rates. Home prices rose dramatically across the U.S. during the pandemic, and now, in some parts of the country, homebuyers are feeling the pain of both high mortgage rates and expensive housing.
fizkes
Photo Credit: fizkes / Shutterstock
Mortgage interest rates are now more than double what they were in early 2021. As a result, rising home prices have started to slow down, but not by enough to offset the increased borrowing costs caused by higher rates. Home prices rose dramatically across the U.S. during the pandemic, and now, in some parts of the country, homebuyers are feeling the pain of both high mortgage rates and expensive housing.
Fed rate increase could signal lower mortgage rates ahead
At the beginning of the COVID-19 pandemic, the Federal Reserve took aggressive actions to help keep the economy afloat. Mortgage interest rates began to fall steadily, and the average 30-year fixed rate reached a historic low of 2.65% in January 2021. However, inflation began climbing rapidly, and the Federal Reserve started raising interest rates in March. When gradual rate hikes weren’t enough to tamp down inflation, the Fed began moving more aggressively. In November, the average 30-year fixed rate briefly topped 7%, the highest it’s been in more than two decades.
At the beginning of the COVID-19 pandemic, the Federal Reserve took aggressive actions to help keep the economy afloat. Mortgage interest rates began to fall steadily, and the average 30-year fixed rate reached a historic low of 2.65% in January 2021. However, inflation began climbing rapidly, and the Federal Reserve started raising interest rates in March. When gradual rate hikes weren’t enough to tamp down inflation, the Fed began moving more aggressively. In November, the average 30-year fixed rate briefly topped 7%, the highest it’s been in more than two decades.
Fed rate increase could signal lower mortgage rates ahead
Due to both the drive up in home prices that began in 2020 and rising interest rates, mortgage payments have increased rapidly over the last year. The monthly mortgage payment for a median-priced home is now 66% higher than a year ago. According to data from Zillow, the national median home price increased from $318,432 to $357,544 from late November 2021 to late November 2022. At the same time, the average 30-year fixed mortgage rate went from 3.11% to 6.49%.
Due to both the drive up in home prices that began in 2020 and rising interest rates, mortgage payments have increased rapidly over the last year. The monthly mortgage payment for a median-priced home is now 66% higher than a year ago. According to data from Zillow, the national median home price increased from $318,432 to $357,544 from late November 2021 to late November 2022. At the same time, the average 30-year fixed mortgage rate went from 3.11% to 6.49%.
Fed rate increase could signal lower mortgage rates ahead
Both mortgage interest rates and home prices vary on a geographic basis. Additionally, some parts of the country have seen smaller declines in home prices than others. As a result, homebuyers in certain areas have been much more impacted by rising interest rates. On a regional level, the Southeast has experienced some of the largest increases in mortgage payments from last year. Out of the entire U.S., Florida homebuyers have been the most impacted by rising interest rates: mortgage payments for a median-priced home in Florida have increased by over 80% from 2021. South Carolina is close behind, with mortgage payments going up by 76%. While mortgage payments have risen dramatically across the U.S., the increase has been the smallest in Idaho and California, where mortgage payments have gone up by 52.3% and 56.3%, respectively.
To determine the locations where homebuyers are most impacted by rising interest rates, researchers at Construction Coverage analyzed the latest data from Zillow and Freddie Mac. The researchers ranked metros according to the percentage change in the monthly mortgage payment for a median-priced home from 2021 to 2022. Researchers also calculated the total change in mortgage payment from 2021 to 2022, the mortgage payment for a median-priced home, and median home price.
Here are the U.S. metropolitan areas where homebuyers are most impacted by rising interest rates.
Both mortgage interest rates and home prices vary on a geographic basis. Additionally, some parts of the country have seen smaller declines in home prices than others. As a result, homebuyers in certain areas have been much more impacted by rising interest rates. On a regional level, the Southeast has experienced some of the largest increases in mortgage payments from last year. Out of the entire U.S., Florida homebuyers have been the most impacted by rising interest rates: mortgage payments for a median-priced home in Florida have increased by over 80% from 2021. South Carolina is close behind, with mortgage payments going up by 76%. While mortgage payments have risen dramatically across the U.S., the increase has been the smallest in Idaho and California, where mortgage payments have gone up by 52.3% and 56.3%, respectively.
To determine the locations where homebuyers are most impacted by rising interest rates, researchers at Construction Coverage analyzed the latest data from Zillow and Freddie Mac. The researchers ranked metros according to the percentage change in the monthly mortgage payment for a median-priced home from 2021 to 2022. Researchers also calculated the total change in mortgage payment from 2021 to 2022, the mortgage payment for a median-priced home, and median home price.
Here are the U.S. metropolitan areas where homebuyers are most impacted by rising interest rates.
Fed rate increase could signal lower mortgage rates ahead
Getty Images
The Federal Reserve's rate increase might not have much of an effect on mortgage rates in the short term — but it could help to push them lower in the long term.
Getty Images
The Federal Reserve's rate increase might not have much of an effect on mortgage rates in the short term — but it could help to push them lower in the long term.
