The Fed Just Delivered Bad News for Homeowners

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  • The Fed raised interest rates by 0.50%, its largest increase since 2000.
  • The Fed also announced plans to begin to shrink its portfolio of mortgage-backed securities, which will increase mortgage rates.
  • Mortgage applications have fallen to their lowest level since 2018 due to increasing mortgage rates and high home prices.

Homeowners who want to refinance will definitely feel some aftershocks.

The Federal Reserve just raised its target federal funds rate by 0.50% on Wednesday to contain the highest inflation in 40 years. By raising the cost to borrow money, this will hopefully slow the demand for goods and services. The Fed’s goal is to curb inflation without impeding economic growth.

Homeowners looking to buy a new home or refinance an existing home will not be immediately impacted by the hike. While the change in rate will directly and indirectly affect the cost of all kinds of loans, mortgages are primarily influenced by the yield on 10-year Treasury bonds. Anticipating the Fed’s decision to raise rates, the yield on the 10-year Treasury recently hit 3% for the first time since late 2018.

Fed reducing holdings of mortgage-backed securities

In addition to raising interest rates, the Fed announced plans to begin reducing its holdings of mortgage-backed securities (MBS) starting June 1. The buying and selling of these securities is another tool the Fed uses that directly influences mortgage rates.

By shrinking its $9 trillion asset portfolio starting next month, there will be greater supply, pushing mortgage rates up. On the flip side, when the Fed announced it would buy unlimited amounts of MBS and Treasuries during the pandemic, this increased demand, pushing mortgage rates to all-time lows.

The 30-year fixed-rate mortgage has climbed nearly 2 percentage points since the start of the year, averaging 5.10%, the highest since April 2010. With the Fed deciding to reduce its MBS holdings, homeowners can expect mortgage and refinance rates to continue climbing.

Mortgage applications at lowest level since 2018

With increasing mortgage rates and home prices hitting an all-time high of $375,000 in March, purchasing a home now is 55% more expensive than a year ago. This has started to impact demand for prospective home buyers. According to the Mortgage Bankers Association, mortgage applications have fallen to their lowest level since 2018.

“Mortgages now compared to just a few months ago are costing more money for home buyers,” NAR Chief Economist Lawrence Yun said. This can cost an additional “$300 to $400 more per month, which is a hefty toll for a working family.”

Affordability has become a major issue for prospective homeowners. Wages have risen by 6% in the past year but the gain has been wiped out by inflation. Higher mortgage rates will also impact those looking to refinance their home. While mortgage rates are still at a historical low, the high costs will slow home sales and home price appreciation.

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