How will this ninth increase in the rate since March 2020 impact the housing market? Here’s what experts say!
March is the official beginning of Spring in the United States, but you wouldn’t know it by the record snow falling across the country this month. Also, March is expected to be the start of the Spring homebuying season. Well, the Federal Reserve put a damper on that, like Mother Nature has piled on the snow in many areas across the U.S. On March 22, the Fed announced another increase to the Fund Rate, this time it was 25 basis points.
Is The Fed in a Pickle?
The Fed was faced with strong evidence that it had to continue raising interest rates. Unfortunately, there were also many reasons, including the possibility of another banking crisis, it had to consider a departure from its upward climb.
Current economic data has suggested that inflation is dropping slower than many analysts expected. Average consumer prices are about 6% higher than a year ago and while that’s lower, in March of 2022 the CPI rose 8.5% year over year. So, when you combine the recent uptick with last year’s you really get an understanding of how stifling inflation has become for many Americans. Meanwhile, many forecasters assume the figure will remain above 3% for most of this year. That’s higher than Fed officials are comfortable with and much higher than families can afford as historically, for much of the 21st century, inflation has been around 2%.
Fed officials continued raising their benchmark interest rate intending to slow the economy by increasing the cost of homes, cars and other items people buy with debt. Some Fed officials favored a quarter-point increase, which is what they did, and it is identical to the increase it made at its meeting in February. There were some members of the Fed that preferred a half-point increase, in response to the worrisome recent inflation data.
What the Fed Chair Is Saying
In a press conference, Fed Chairman Jerome Powell acknowledged that since the previous meeting in February, economic indicators have generally come in stronger than expected.
“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses,” the Fed chair said. “It is too soon to determine the extent of these effects and therefore too soon for the Fed to know how or whether its plans for interest rates might be affected,” he said, adding that it’s too soon to determine how monetary policy should respond to the banks collapses.
Most economists expect more to come on the bank collapse front.
A Choice Between Inflation or Consumer Panic
The Federal Reserve faced a tough decision this time. Recent bank closures and rising inflation have collided and the Fed officials had to step back from the assumption it would raise 50 basis points. They had to consider whether to raise interest rates in response to mounting inflation statistics or should they pause their interest rate increases and face the risk that inflation will continue. The compromise was 25 basis points.
The banking troubles of the past two weeks all but shut down the thought of raising by 50 basis points. Recently, some customers at Silicon Valley Bank and Signature Bank became worried that the bank may not have enough money to support their deposits. What happened? A classic bank run occurred…but this time it was digital! Where funds virtually evaporated by customers withdrawing funds within hours: $42B in a single day at Silicon Valley Bank. And the withdrawals led to the collapse of both banks and other banks have signaled they are in jeopardy.
The decision The Fed faced was inevitably fraught. The Fed chose between potentially aggravating problems plaguing the financial markets and seeming soft on inflation.
Mortgage Industry Economists Are Reading the Tea Leaves
MBA economist Mike Fratantoni commented about the rate increase by explaining that even small adjustments to interest rates highly influence buyers.
“Homebuyers in 2023 have shown themselves to be quite sensitive to any changes in mortgage rates,” said Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association. “With this move from the Federal Reserve, MBA is holding to its forecast that mortgage rates are likely to trend down over the course of this year, which should provide support for the purchase market.”
Would-be homebuyers can see the effects of a change in mortgage rates on their monthly budgets.
Anyone shopping for a new home has lost considerable purchasing power, indicated Sam Khater, Freddie Mac’s chief economist. The average rate for a 30-year, fixed-rate mortgage currently sits at 6.66% (as of March 22, 2023), up from 4.40% when the Fed started raising rates last March.
Khater said, “Our research concludes that homebuyers can potentially save $600 to $1,200 annually by taking the time to shop among multiple lenders.”
Clearly, Khater believes that homebuyers can significantly benefit from shopping around for additional rate quotes.
Other home loans are more closely tied to the Fed’s actions. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year after an initial fixed-rate period. But a HELOC adjusts right away. The average rate for a HELOC is up to 7.76% from 3.96% a year ago.
The Fed Will Meet Again in May
Goldman Sachs Chief Economist Jan Hatzius expects another increase at that time.
“We have left our forecast for the peak funds rate unchanged at 5.25-5.5% and now expect additional 25 basis point rate hikes in May and June. Our baseline forecast is 25bp above the FOMC’s forecast of 5-5.25%, and our weighted-average path for the funds rate is above market pricing.”
How much more can the mortgage industry take? That remains to be seen. Come back to the OpenClose blog to check out the commentary round-up after the next meeting.