Mortgage rates: While the Federal Reserve is expected to hike interest rates again this week, mortgage rates are unlikely to rise.
Mortgage rates have experienced several ups and downs this year, exceeding 7% for weeks in October and November.
However, signs of cooling inflation have made it easier for mortgage rates to breathe.
According to a survey by Bankrate (owned by Red Ventures in addition to NextAdvisor), the average for a 30-year fixed-rate mortgage is back to 6.62%.
Partner and managing director of financial advisory firm Lerner Group JR Gondeck is optimistic about rates.
“From a mortgage perspective, rates have actually gone down even though the Fed has raised rates. We would expect the worst is over,” said Gondeck.
“We think you’re going to see lower rates into the next year despite further rate hikes.”
Meanwhile, analysts and financial markets expect the US Federal Reserve to raise its benchmark short-term interest rate (the federal funds rate) by 50 basis points this week.
However, experts say the next steps for mortgage rates depend more on the tone of Fed Chairman Jerome Powell’s forecast for 2023.
First American Financial Corporation deputy chief economist Odeta Kushi suggested it was all about expectations.
“If the market is surprised by the Fed’s projections, we could see some movement in mortgage rates,” said Kushi.
“Whether that surprise is to the upside or the downside.”
Housing costs already make up a significant part of consumer spending.
The housing market has been a critical indicator in the Fed’s ongoing efforts to curb inflation (7.7% year over year in October).
Since early 2022, the Fed has raised the federal funds rate from 0 to 3.75% in one of the central bank’s fastest rate hikes.
The efforts were all an attempt to curb inflation.
Poljak Group Wealth Management co-founder Denis Poljak provided a unique insight into inflation, saying:
“Inflation is, essentially, too much money chasing, too few foods.”
The Federal Reserve makes it harder to borrow money by raising interest rates.
According to them, they will continue their rate hikes until they see a sustained drop in consumer spending and inflation.
The current inflationary environment did not develop overnight.
It has gained momentum since the onset of the 2020 pandemic, with the real estate market being a clear example.
The pandemic boom in the housing market has seen a massive increase in prices, with demand not meeting supply.
Furthermore, house price growth continued until the peak reached in mid-2022.
Since then, prices have slowly declined as high mortgage rates have curbed demand.
Additionally, the housing market has been in neutral territory lately.
However, falling home prices and stabilizing mortgage rates may bring affordability within reach, especially for new buyers.
The Fed & mortgage rates
Despite the parallelism, mortgage rates are not directly correlated to Federal Reserve actions.
Instead, they react to inflation.
When people take out a mortgage, it is sold to bond market investors as part of other mortgages known as mortgage-backed securities.
Due to inflation and rising borrowing costs, lenders have had to raise mortgage rates to offer mortgage-backed securities investors a better return.
When inflation became more accommodative in October, mortgage rates fell, and the bond market rallied.
The housing market represents a significant portion of consumer spending.
If the Fed slows the housing cost growth, it will likely have a domino effect on the economy.
“As long as new lease inflation keeps falling, we would expect housing service inflation to keep falling sometime next year,” said Jerome Powell.
“Indeed, a decline in this inflation underlies most forecasts of declining inflation.”
The Fed’s pace
The Federal Reserve has consistently maintained interest rate hikes through its December meeting.
The Fed aggressively raised rates by 75 basis points in four consecutive meetings.
“And the reality is, it’s working,” said JR Gondeck. “They started late, but they’re catching up to where things are.”
Despite the progress, the Fed must strike a balance between staying aggressive and going too fast.
The decision to hike by 50 basis points instead of 75 indicates the Fed is pushing for a soft landing rather than a full-blown recession.
“This way, Powell can continue with his agenda to slow the economy down but help create a softer landing, a more moderate recessionary environment,” says Poljak.
The Fed must observe incoming housing inflation data to arrive at a soft landing or moderate recession.
“The housing market is the leading indicator of a recession,” says Odeta Kushi.
“But traditionally, it has also aided the economy in recovering from one.”
At its December meeting, the Federal Reserve will adjust rates and offer forecasts for 2023.
The latest inflation report shows a positive sign, but more is needed for the Fed to slow down rate hikes.
The Fed has indicated it is reluctant to ease rate hikes until it sees evidence that inflation has been at or below the federal funds rate for several quarters.
However, further hikes may not lead to dramatic changes in mortgage rates.
Signs of cooling inflation are likely to stabilize mortgage rates at lower levels.
“I think the rate hike is pretty much already priced into the market. The Fed is going to raise their short-term rate by half a percent,” said Gondeck.
“But from there, it’s going to matter more what they say about the future, and specifically, the tone they use.”