The central bank does not set mortgage costs directly, but changes in its key rate – known as the federal funds rate – ripples through the economy and influences all manner of lending. Since March, the Fed has raised rates five times, taking its benchmark rate from near zero to between 3% and 3.25%. The central bank is expected to raise rates by 0.75 percentage points next week.
These measures have already had major consequences for the housing market, and soaring mortgage rates have prompted some broader concerns that the Fed is holding the economy back with way too much strength.
“People can say, ‘Well, you know, one percent [added] on the mortgage rate is still low. But we had several percent off the mortgage rate in a short time,” said Diane Swonk, chief economist at KPMG. “The rapid pace at which they are raising rates is, in itself, destabilizing.”
The average mortgage rate has increased at breakneck speed. A year ago, it was 3.09%; even last March, the average rate for a 30-year fixed mortgage was below 4%. The 3.22% increase in January to 7.08 percent now, a jump of 3.86 percentage points, is the largest rate increase in a year. The previous record was 3.59 percentage points in 1981.
For much of the pandemic, low rates drove aspiring home buyers into the market, jostling for the few available homes and driving up prices. But now, fearful of shelling out hundreds of dollars more a month on a mortgage, buyers are pulling back, increasing the supply of available homes and helping prices fall overall. This year, when rates were below 4%, a family earning the median household income of $71,000 could afford a $448,700 home with a 20% down payment. This week, with rates around 7%, they could only afford a $339,200 home, according to real estate agent.com.
Home prices are falling at a record pace. The Case-Shiller home price index released earlier this week showed prices were 13% higher in August than they were a year ago, up from 15.6% higher the month before. . The 2.6 percentage point difference between those two months is the biggest drop in the history of the index, which debuted in 1987.
Zillow announced on Wednesday that it had laid off 300 workers in several departments, including home loans and closing services, although the company said it is not subject to a hiring freeze.
Demand for mortgages also fell as quickly as rates soared. The total volume of applications is at its lowest level since 1997, according to the Mortgage Bankers Association. Refinancings are down 86% compared to a year ago, and mortgage lenders nationwide, including at major banks, laid off employees as the market slowed. And rising rates have boosted interest in variable rate mortgages. The share of ARM applications was 12.7%.
Home builders are also caught off guard. Overall housing starts fell 8.1% to a seasonally adjusted annual rate of 1.44 million units in September, according to a report released earlier this month by the U.S. Department. of Housing and Urban Development and the US Census Bureau. So far this year, single-family housing starts are down 5.6% from this point last year.
Builder confidence also fell for the 10th consecutive month in October, falling to its lowest level since 2012, excluding the two-month period in spring 2020. the pandemic has begun. This is half the level of six months ago.
“This will be the first year since 2011 to see a decline in single-family home starts,” Robert Dietz, chief economist for the National Association of Home Builders, said in a statement. “And given expectations of high interest rates due to Federal Reserve actions, 2023 should see further declines in single-family construction as the housing contraction continues.”
Still, the Fed’s tools are limited, and officials regularly point to the housing market as one of the clearest signs that their rate hikes are having the intended effect.
“We are starting to see some adjustment to excess demand in interest rate sensitive sectors like housing,” Fed Governor Christopher Waller said in a statement. speech this month. “But more needs to be done to bring inflation down significantly and persistently.”
When or how Fed rate hikes will outpace inflation elsewhere in the economy is still unclear. The rate hikes are designed to stifle demand, but they do nothing to address supply issues, like oil and gas shortages, affordable apartments or chips for new cars. Overall, consumer prices remain stubbornly high, rising 8.2% in September, compared to the previous year.
Rents have also increased by 7.2% over the past year, and rents increased by 0.8% from August to September. Goldman Sachs has projected headline housing inflation to peak at 7.5% next spring before slowly decelerating to just under 6% by the end of 2023. This has major implications for Fed policy, as housing costs are a huge part of the basket of goods. used to measure inflation in the economy.
But the slowdown in the housing market could also finally cool rental prices. National rent growth fell to its lowest annual rate (7.8%) since June 2021, according to real estate agent.com. The median rental price in the United States recorded its second month-over-month decline in eight months in September.
Rising mortgage rates are slowing the market even in places where it was hot during the pandemic. In 2020 and 2021, sale prices skyrocketed in the Hudson Valley, as transplants in New York and elsewhere clamored for the few available homes. But as mortgage rates soar, the number of available homes has more than doubled in the past three months, from about 150 units to about 380, said Ryan Basten, associate broker at Berkshire Hathaway HomeServices Nutshell Realty.
This is an encouraging sign that the market is returning to some version of normal. But Basten said there was a lot of uncertainty about the future. He reviewed recent mortgage rate hikes: 5% “wasn’t too bad”, he said, and 6% percent was “achievable”. But as the Fed prepares to raise rates two more times before the end of the year, Basten said he and others in the industry wonder if there is going to be a real market downturn.
“We can only face what we are facing now. I don’t see mortgage rates going up to 10 [percent]. If they did, it would look like a recession,” Basten said. “Eight [percent] feels bad. Ten percent would be like, ‘Wow, where do we go from here?’ ”