The Fed Raises Interest Rates by 0.50%. How Will This Affect the Housing Market?

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  • The Fed raises rates half a percentage point, its largest increase since 2000.
  • While Fed rate changes don’t directly affect mortgages, home rates are likely to continue rising due to inflation.
  • Higher mortgage rates and record-breaking home prices have impacted demand for prospective home buyers.

Get ready to see some changes in the housing market.

The Federal Reserve just raised its target federal funds rate by 0.50%. This half-point increase is the largest increase in 20 years. The Fed’s focus is to tackle inflation, which is at a 40-year high, by raising the cost to borrow money. This slows the demand of goods and services, putting pressure on rising prices.

How the Fed’s rate impacts mortgage costs

The Fed’s target rate directly and indirectly affects the cost of all kinds of loans, from auto loans to mortgages. Most homeowners won’t be impacted immediately by the hike. Mortgage rates typically follow the yield on 10-year Treasury bonds. Mortgage rates are also more influenced by overall demand for mortgage-backed securities.

These Treasury yields, particularly the 10-year yield, reflect investors’ expectations for short-term interest rates and outlook on the economy. The yield on the 10-year Treasury recently hit 3% for the first time since late 2018, reflecting the Fed’s decision to raise rates. Other factors also impact mortgage rates, such as your credit score and down payment size.

Mortgage rates expected to continue rising

While mortgage rates are not directly connected to the federal funds rate, they are still expected to continue climbing. With inflation at a 40-year high, mortgage rates are expected to rise until the Fed is able to tackle inflation.

According to Freddie Mac, the rate on a 30-year fixed-rate mortgage averaged 5.10%, the highest since April 2010. Mortgage rates have climbed nearly 2 percentage points since the beginning of the year. This is the fastest pace in nearly four decades and will continue to make it even more expensive for those looking to buy a home.

The median home price hit $375,000 in March, an all-time high as buyers looked to close deals before mortgage rates rise even more. According to the National Association of Realtors (NAR), purchasing a home now is 55% more expensive than a year ago.

Demand for housing slows

Higher mortgage rates coupled with high home prices have impacted 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. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”

“Wages have risen by 6% from one year ago and that's good news,” he continued. “But inflation is at 8.5%.” With wage increases wiped away by inflation, and home prices 15% more expensive than a year ago, affordability has become a major issue. Higher mortgage rates will inevitably slow the number of homes sold in the coming months. This will also put the brakes on home price appreciation.

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