How Will Mortgage Rates React To The Fed’s Rate Hikes?

With the Fed once again raising the federal interest rate by 75 basis points (bps), homebuyers are understandably worried that these measures to stem inflation will cause mortgage rates to go up—further increasing the cost of buying a home. 

According to Fed Chairman Jerome Powell, the goal is to slow the pace of interest rate hikes as soon as inflation data shows the impact of recent rate increases. 

There is reason to hope that even with Wednesday’s hike, mortgage rates will stabilize, encouraging homebuyers to reenter the market. 

Because ultimately, the federal interest rate is only one of multiple factors affecting it. 

Mortgage rates have already decreased

After peaking at 6.06% on June 14th—doubling the historic pandemic-induced lows of 2020—mortgage rates have dropped to around 5.5%. 

Despite that encouraging dip, demand for purchase mortgages las week was 18% lower than a year ago, according to the Mortgage Bankers Association (MBA). 

The big question is whether this slowdown in demand is due more to consumer fear or to housing affordability. With the mortgage rate hikes adding hundreds of dollars to the monthly mortgage payment for a median-priced home, some homebuyers have paused their plans to buy a home indefinitely. Others are holding off to see what happens next. 

Mike Frantatoni, chief economist for the Mortgage Banker’s Association, has noted the drop in mortgage rates. He stated that mortgage rates may have already peaked between the tug of rate hikes in response to inflation and the increasing risk of recession. If so, rates could stabilize between 5% and 5.5% for the rest of the year, which may draw more homebuyers back to the market. 

Fed dumping of mortgage-backed securities

On top of the rate hikes, Fed policymakers plan to continue reducing its mortgage investments by allowing up to $17.5 billion maturing assets to roll off the books every month. They plan to slowly increase the monthly attrition over three months to $35 billion a month. Caps for Treasury roll offs will be even higher—from $30 billion to $60 billion a month after three months. 

The Fed took on trillions of dollars in mortgage-backed securities earlier in the pandemic to keep interest rates low and stimulate the economy. Now, they’re backing off, which will increase the supply of those securities, causing a drop in prices and a rise in interest rates. 

If the Fed took it one step further and started actively selling those mortgage-based securities to reach its targets for balance sheet reduction, it would likely drive mortgage rates back up. 

Takeaways for real estate agents

As a real estate agent, you’re the point person for your prospects and clients who have questions about the housing market and what recent changes mean for them. Managing seller expectations and handling buyer cancellations will play a big role in this market. You also need to be prepared to answer questions about affordability and mortgage rates.   

While financing questions are better left to a mortgage lender, there’s no reason not to learn as much as possible to help your prospects understand the market and the advantages of buying a home. 

While we can’t expect a return to 3% interest anytime soon, we can help every client make the best of the market we have.