Mortgage rates have risen steadily over the past year, and with the Federal Reserve’s recent rate hike, it’s unlikely to slow anytime soon, according to an economist.
The rise in interest rates “means that mortgage rates will continue to rise and that we will see some pullback in the housing market,” Dana Peterson, chief economist at The Conference Board, said on Yahoo Finance Live (video above). ). “And that’s a function of, yes, very high prices, which affects affordability, but also increases interest rates.”
The Fed raised interest rates by 75 basis points on Wednesday, and the central bank said it “believes continued increases in the target range will be appropriate.”
Mortgage rates, meanwhile, are at 5.4%, according to Freddie Mac, which is more than two percentage points higher than when 2022 started.
The Fed sets the interest rates at which banks borrow money from the central bank. When Fed interest rates rise, it directly affects mortgage rates, as lenders tend to increase interest payments on homebuyer loans as well.
Fannie Mae’s Home Purchase Sentiment Index fell to 64.8 for the month of June, the second-lowest in a decade. According to the survey, only 20% of consumers think now is a good time to buy a home.
“If we look at our own confidence measures, people say they’re lowering their expectations for home buying,” Peterson said.
What the Fed’s next move could mean
For home buyers, higher interest rates typically reduce their purchasing power.
Pending home sales – houses for sale – are a leading indicator of the health of the real estate market. That number is down 20% over the past month from June 2021.
Existing homeowners with fixed-rate mortgages will not feel the same impact as buyers and sellers unless they are considering selling their homes in the near future. However, homeowners with adjustable-rate mortgages will see their interest payments increase going forward.
The story goes on
According to Peterson, that’s exactly what the Fed wants to see in the midst of the current inflationary environment: a “moderating of domestic demand,” with housing being a big component of that.
Demand for homes has increased over the past two years. During the height of the coronavirus pandemic, interest rates fell to historic lows. At the same time, many homebuyers have left the big cities in favor of suburbs and smaller towns.
Scott Teel, a high school history teacher, wears a For Sale sign as part of his second job as a real estate agent in Moore, Oklahoma. (Photo: PAT CARTER/AFP via Getty Images)
“Then you have millennials,” Peterson said. “They’re all turning 40, have families, and are looking for the next upgrade in housing. All of these things are demands that the Fed wants to counter.”
Peterson reckons the Fed isn’t done raising rates yet, stating that the central bank could even go into “restrictive territory,” which would mean interest rates above 3% and even close to 4% by early 2023 .
“We think this action, this very anti-inflation aggressive stance, is actually going to trigger a recession,” Peterson said, “probably an actual recession will start, which the NBER would agree to, probably from the fourth quarter of this year.”
Fed Chair Jerome Powell said at his most recent press conference on Wednesday that the economy has not yet entered a recession. “There are just too many areas in the economy that are doing well,” Powell added.
Ethan is a writer for Yahoo Finance.
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