Perhaps the most tangible impact on everyday Americans of the Federal Reserve’s inflation-fighting campaign is the significant increase in mortgage rates, as the limited relief for mortgage rates—even as the Fed takes on a friendlier tone—indicates just how profound an impact prospective homebuyers feel.
You can likely kiss the days of 3%, 30-year mortgage rates goodbye, at least for the near future.
After hovering at a record low of below 3% for much of 2020 and 2021, average 30-year fixed mortgage rates shot up to as high as 7.8% last fall, according to federal mortgage buyer Freddie Mac.
The more than doubling in home loan borrowing costs coincided with the Fed’s dramatic shift in its federal funds rate, which sets the lending costs for transactions between banks and strongly influences the mortgage rates offered by financial institutions.
In a bid to kill high inflation, the Fed hiked its interest rates from the 0% to 0.5% range (where it sat from March 2020 to March 2022) to a two-decade high of 5.25% to 5.5% by last July, and rates have remained at that level since then.
The light at the end of the tunnel has begun to flicker for prospective homebuyers, as mortgage rates have dipped slightly below 7% in recent weeks as the Fed signals it will soon bring down the federal funds rate as inflation moderates.
Evidence suggests the historically low mortgage rates enjoyed during the early days of the pandemic are unlikely to return. The Fed most recently said it expects interest rates to return to 2.5% in the long run, which itself would be the highest level since the Great Recession. Goldman Sachs economists said this week they anticipate the federal funds rate will settle much higher at 3.25% to 3.5% due to lingering inflation. Mortgage rates historically sit an average of about two percentage points above yields for 10-year U.S. Treasury bonds, which are highly correlated with market expectations for the long-run federal funds rate and now sit at about 4.3%. Goldman projections imply 30-year mortgage rates are likely to settle somewhere close to 5% when the Fed concludes its current cycle. From 2011 to 2022, mortgage rates never topped 5%.
Unless there’s another “catastrophic event” to the global economy like the outbreak of the Covid-19 pandemic, “we’re going to see mortgage rates that oscillate somewhere between 4.5% and 6%” assuming relatively stable inflation, Mark Palim, deputy chief economist at federal mortgage provider Fannie Mae, told Forbes earlier this year.
Mortgage applications decreased 14% on an annual basis last week, according to a Mortgage Bankers Association survey released Wednesday morning. Prospective homebuyers are indicating “sensitivity” to interest rate expectations, the organization’s deputy chief economist Joel Kan noted in a statement.
The Fed will reveal its latest monetary policy decision Wednesday afternoon, with the market pricing in the maintaining of current rates as an all but certainty.