The Federal Reserve May Be Slowing Down Its Rate Hikes. Here's What That Could Mean for Mortgage Borrowers

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  • After months of aggressive interest rate hikes meant to fight inflation, the Federal Reserve is planning to slow down in that regard.
  • That could pave the way for mortgage rates to drop from where they're at today.

Home buyers might soon get some much-needed relief.

It's fair to say that 2022 has been a very tough year for home buyers. Not only have home prices been elevated all year, but over the past 11 months, mortgage rates have risen sharply.

In fact, at the start of the year, a borrower with reasonably good credit could take out a 30-year mortgage at around 3%. These days, that same borrower might be looking at a rate of around 7% -- even with excellent credit.

Now part of the reason mortgage rates have risen so dramatically this year is that the Federal Reserve has been very aggressive with interest rate hikes. The Fed doesn't set mortgage rates, or any consumer borrowing rates, directly. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing.

But a higher federal funds rate tends to indirectly drive up the cost of consumer borrowing. And so that's part of the reason mortgage rates are now sitting at their highest levels in several decades.

But things could change for the better in 2023. That's because the Federal Reserve is planning to slow down its interest rate hikes. And if mortgage rates drop, it could open the door to homeownership for a lot of frustrated buyers.

Things might get better in 2023

The reason the Fed has been aggressively raising interest rates is that it wants to slow the pace of inflation, which has been battering consumers. By making it more expensive to borrow, the Fed's goal has been to encourage a slowdown in spending. That slowdown could narrow the gap between supply and demand that caused inflation levels to get so out of hand.

Now to be clear, the problem of inflation is far from over. In October, the Consumer Price Index rose 7.7% on a year-over-year basis. That's a really large jump. But it's also a smaller jump than what we saw in previous months, which is a good sign that inflation levels may be cooling.

Meanwhile, on Nov. 30, Federal Reserve Chair Jerome Powell confirmed plans to slow down on interest rate hikes. This doesn't mean the Fed won't be raising rates in the coming months. But it may do so at a less radical pace. And that could, in time, lead to lower consumer borrowing rates, including mortgage rates.

Will you be able to buy a home in 2023?

You might end up with a lower interest rate on a mortgage in 2023 than what you'd get right now. But that doesn't automatically mean you'll be able to purchase a home next year. That will largely hinge on factors such as your job situation, personal savings level, and general housing market conditions.

If higher-than-average home prices were a problem for you this year, that might continue to be an issue in 2023. Right now, the housing market sorely lacks inventory. So unless real estate supply rises substantially in the new year, home prices could remain elevated.

But that doesn't mean you should give up on buying a home. Housing market conditions could improve, and home prices have the potential to come down -- if not early on in 2023, then perhaps later on in the year. Combine that with lower borrowing costs for a mortgage, and it could set the stage for a lot more people who have struggled previously to become property owners.

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