The housing market in the US has been hit by high mortgage rates that have crossed 7%, the highest in about 20 years. The mortgage rates have been affected by the aggressive Fed rate hikes, as the agency tries its best to cool off the four-decade high inflation.
On November 2, the Fed rate hikes revealed that the agency is on the warpath as it struggles with a record inflation. Fed Chair Jerome Powell revealed that the hikes might continue and will depend on market conditions.
Fed Rate Hikes and Housing Market
As inflation hollows out the market, the Fed has upped its lending rate six times this year. The latest was early this month where Powell disclosed that the situation is worse than expected and the Fed might consider more increases in the future.
Although mortgage rates are not directly tied to Fed rate hikes, they are influenced by investor views on future inflation and global demand for US Treasury bills.
This year, inflation has had a severe impact on consumers as prices for everything from gas to rent has gone up, squeezing household budgets. As a result, many potential home-buyers have had to place their plans on the backburner.
Real estate experts share that six months back buyers were happy with what they could get, but now they want the best for their buck. It does not help matters that budgets have tightened and buyers are in no hurry to part with cash. As a result, sellers are also not receiving the kind of extreme offers they were used to earlier.
A statement after the Fed rate hikes revealed that the agency is considering the cumulative impact of the consecutive rate hikes. The hikes have been implemented to cool down an overheated market but so far have resulted in pushing up mortgage rates, reducing buying power for the middle-class. With rising costs for food, rent, and gas, most households
Mortgage Rates and Diminished Buying Power
Thirty-year mortgage rates have now hit 7% and have discouraged potential buyers. “We’re kind of in this middle ground right now. Sellers still want the most that they can get for their house and they don’t want to do the repairs and are that within the buyers are being more cautious with what they’re purchasing,” Emily Ferguson, a real estate agent told WLBT.
Prospective buyers complain that the rates are not going down and with each percentage increase their buying power goes down. The housing market has remained kind of stubborn through the Fed rate hikes but the latest increase is set to affect people looking to buy places for business or personal use.
As mortgage rates have crossed 7%, many individuals also find themselves ineligible for certain loans as prior debt and inflation have eaten into their spending power. Some even saw their pre-approvals rescinded as budgets take a nose-dive with rising costs. Analysts attribute the rise in rates to the volatility in the market.
One of the reasons why mortgage rates are so high, is because lenders often package them into bonds and sell them to investors. Prepayments, interests, additional payments are all sold to investors, and the profits are redirected into giving out more mortgage loans. Usually, this market stays stable but Fed rate hikes can disturb the outlook.
In such cases, it disrupts investor calculations on returns, which either forces investors to sell or demand higher interest rates from lenders as the bonds have become riskier. Risk-averse Wall Street has also distanced itself from riskier assets and has shifted its focus towards reliable, long-term yields.
The current volatility in the housing market has pushed up interest rates as investors are scarce and most banks do not want to pile on the risk.
