What The Fed’s Final Rate Hike In 2022 Means For Housing

This is the seventh time in a row that the Federal Reserve has raised rates this year. This time, though, the increase is smaller.

On December 14, Fed Chairman Jerome Powell said that the federal funds rate would go up by half a point. This is less than the three-quarter-point increases that have been made at the last few meetings. Still, it hasn’t raised rates this much in one year since the 1980s.

The Fed raised interest rates by a quarter point in March 2022 and by a half point in May 2022. This was done to stop inflation from getting out of hand.

In June, it raised them even more, by three-quarters of a percentage point, which at the time was the biggest increase in Fed rates since 1994. It did the same thing in July, September, and November.

The goal of the increases is to slow down an economy that was on fire after the coronavirus recession of 2020 ended. This huge recovery has led to a red-hot housing market with record-high home prices and a very small number of homes for sale.

But since the end of summer, the housing market has shown signs of cooling. Prices have stopped going up across the country, and in many markets, they have even gone down.

And home prices are affected by a lot of different things, not just interest rates. Because of this, it’s hard to say how the Fed’s actions will affect the housing market.

The housing recession is here. Right now, the most important question is how fast it will spread to the rest of the economy.

Higher rates are hard for both buyers and sellers. Buyers have to deal with higher monthly payments, and sellers get less interest in their homes or lower offers.

How The Fed Affects Mortgage Rates

Mortgage rates are not set by the Federal Reserve, and the central bank’s decisions don’t have as much of an effect on mortgages as they do on savings account and CD rates. Instead, mortgage rates tend to move in sync with 10-year Treasury yields.

Still, how the Fed acts sets the tone for mortgage rates as a whole. Investors and mortgage lenders keep a close eye on the Fed, and how the mortgage market tries to figure out what the Fed is doing affects how much you pay for your home loan.

The rate hike in December was the seventh one in 2022, a year in which mortgage rates went from 3.4% in January to 7.12% in October before slowly going back down. When prices go up like this, it makes it harder for people with lower incomes and first-time buyers to buy a home.

How Much Do Mortgage Rates Change The Demand For Homes?

There’s no doubt that the housing boom of 2020 and 2021 was helped by record-low mortgage rates. Some people think that it was the most important thing that sent the housing market into overdrive.

What will happen to home sales and prices now that interest rates are higher than they have been in 20 years? Because of mortgage rates, refinancing has pretty much stopped and buying a home has slowed down a lot. Not only have sales slowed, but economists expect prices to drop by anywhere from a few percentage points to more than 20 percent.

Yet, housing economists say that rising mortgage rates tend not to hurt home prices or sales in the long run. That’s because the things in life that make people want to buy a home, like having a child, getting married, or getting a new job, don’t always line up with mortgage rate cycles.

Even though mortgage rates reached 18 percent in the 1980s, Americans still bought homes. Rates of 8 to 9 percent were common in the 1990s, and Americans kept buying homes. During the housing bubble from 2004 to 2007, prices went up and mortgage rates were higher than they are now.

So the current slowdown might not be a sign of a coming crash as much as a return to normalcy in a market that was going too fast.

The Housing Market Is Tough For Buyers Now

The housing market is the most sensitive to changes in the Federal Reserve’s interest rate policy, and these changes have the most immediate effects on the housing market. This year’s rising mortgage rates are causing home sales to slow down.

The average monthly mortgage payment has gone up by 28% in the past year. This is a bit of sticker shock that will have an effect on the housing market as a whole.

The National Association of Realtors (NAR) says that the housing squeeze is already getting better because demand is going down. In October, there were enough homes for sale to last 3.3 months, up from a record-low of 1.6 months in January.

Next Steps For Borrowers

Here are some ways to deal with interest rates that are going up.

Look at different mortgages. You can find a better-than-average rate if you shop smart. As the boom in refinancing slows down, lenders are eager to do business with you.

Be cautious about ARMs. Adjustable-rate mortgages are getting more appealing, but people should stay away from them. Don’t fall into the trap of using an adjustable-rate mortgage as a way to make your home more affordable.

There isn’t much in the way of savings up front, only an average of half a percentage point for the first five years, but there is a big chance that rates will go up in the future. The terms of new adjustable-rate mortgages change every six months instead of every 12 months, which was the norm before.

Think about a HELOC. Refinancing mortgages are becoming less popular, but many homeowners are turning to home equity lines of credit (HELOCs) to use their home equity.

Bottom Line

Mortgage rates can have a major impact on the housing market and the economic security of homeowners. As a result, prospective purchasers and homeowners should take the time to research and compare mortgage rates before they make a commitment.

When it comes to obtaining a mortgage, there are numerous options available to suit different budgets and circumstances. It is important to compare various lenders, including banks, credit unions, and independent mortgage brokers before making a decision.

Comparing mortgage rates can help you find the best loan package based on how much you can afford to borrow, how much you can pay for closing costs and other associated fees, and how much you are willing to pay for the monthly payment.

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