According to Freddie Mac, mortgage rates reached a 20-year high last week due to rising interest rates, now at a whopping 6.92%. The Federal Reserve is continuing its aggressive monetary policy to squash surging inflation, sending shockwaves throughout the housing market.
The federal funds rate is projected to reach 4.4% by the end of 2022. Russia’s invasion of Ukraine, supply chain issues and record low interest rates during the pandemic led to unprecedented inflation, prompting the Fed’s policy initiative.
While the Fed continues to wrangle with inflation, the housing market is especially feeling the pinch of higher interest rates. The S&P 500 and the New York Stock Exchange also fell 20% from this time last year as a result of these rate hikes. The declines have continued for several weeks.
Despite the Fed’s efforts, the consumer price index has not significantly budged. The index rose to 8.2% in September, far from the Fed’s eventual target of 2%.
For the last 15 years, mortgage rates in the U.S. have been relatively low. Thirty-year fixed mortgage rates were notably low during the previous two years, hovering between 2.5% and 3.5% between 2020 and early 2022.
However, mortgage rates spiked in recent weeks. As of Oct. 13, the thirty-year mortgage rate is at a two-decade high of 6.92%. The fifteen-year rate is at 6.09%.
Freddie Mac’s chief economist Sam Khater released a statement regarding the rates.
“Rates resumed their record-setting climb this week, with the 30-year fixed-rate mortgage reaching its highest level since April 2002. We continue to see a tale of two economies in the data: strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously. The next several months will undoubtedly be important for the economy and the housing market.”
The Fed has been clear about its plan to continue increasing the federal funds rate until prices begin to level out. Mortgage rates tend to rise alongside the federal funds rate.
In September, the chairman of the Fed, Jerome Powell, said there is no way to avoid the rising unemployment and slowing growth that will follow the Fed’s current monetary policy. The consequences of out-of-control interest rates may be even more disastrous for the economy than necessary rising interest rates. The Fed estimates unemployment will climb to 4.4% in 2023 and 2024, up from the current rate of 3.5%.
“We have to get inflation behind us. I wish there were a painless way to do that. There isn’t.”
Some experts are taken aback by how quickly mortgage rates are rising. Economist Matthew Speakman from Zillow told ABC News that “few could have predicted exactly how far and how fast they have risen.”
“There’s not a lot of incentive for rates to come down dramatically in the near-term, but that doesn’t necessarily mean they’re going to keep running away at this pace.”
The relationship between homebuyer behavior and rising mortgage rates is complicated. In general, higher mortgage rates reduce demand, which drives down the prices of homes. Real estate prices are falling, but not as rapidly as expected, in the face of the skyrocketing mortgage rates.
Daryl Fairweather, an economist at Redfin, spoke on the complexity of the current housing market.
“It’s like a standoff between buyers and sellers. Buyers can’t afford higher prices, and sellers don’t want to sell for lower prices.”
Recession worries, rising inflation and high-interest rates have made things appear bleak, but many experts believe mortgage rates will not continue to skyrocket. Lawrence Yun, the chief economist at the National Association of Realtors, predicts that rates will hover around the resistance point of 7%.
“We don’t want to see a bursting out of that second resistance and going up, because you’re talking about 8.5% mortgage rates, something that we clearly do not want to see. The 7% interest rate could be the new normal.”
In July, Yun released a statement predicting that higher mortgage rates will persist as long as the high inflation rate persists.
“If consumer price inflation continues to rise, then mortgage rates will move higher. Rates will stabilize only when signs of peak inflation appear. If inflation is contained, then mortgage rates may even decline somewhat.”