Economists offer insights on record rate hikes
Higher interest rates for home mortgages are continuing to squeeze buyers, but the Fed says their actions are necessary for economic stability.
- Federal Reserve chair Jerome Powell is expected to raise interest rates again to cool the economy and bring down inflation.
- Mortgage interest rates have more than doubled since early 2022.
- Powell acknowledged that Fed actions can feel painful in the short term, but are necessary for price stability and a functioning economy.
Another interest rate hike is expected in the coming months as the Federal Reserve tries to put the brakes on inflation.
Based on a technical analysis of mortgage rates, NAR Chief Economist Lawrence Yun said borrowing rates could continue to climb beyond 8%.
“The next level of resistance is 8.5%, which would be another big shock to the housing economy,” Yun said this month during a presentation to the National Association of Real Estate Investors in Atlanta, Bloomberg News reported.
Mortgage rates have already more than doubled since March of this year. As of October 17, the average 30-year rate for a home mortgage was just over 7%.
The Federal Reserve has increased rates five times in 2022 — the highest number of rate hikes in a single year since the 1980s, according to a Bankrate analysis.
In a press conference announcing the most recent rate hike on September 21, Fed Chairman Jerome Powell acknowledged the short-term pain these actions may be causing: “We understand that our actions affect communities, families, and businesses across the country,” he said, but added, “Without price stability, the economy does not work for anyone.”
Powell indicated that more increases are to come. He said that the Fed anticipates “ongoing increases” and the pace of increase will “depend on the incoming data and the evolving outlook for the economy.”
Higher rates are adding on costs for prospective buyers, many of whom are being priced out of the market. The Mortgage Bankers Association reported that borrowing applications fell 14.2% on Sept. 30 from the previous week, and were at their slowest pace since 1997.
Inflation numbers ‘higher than hoped’
Yun released a statement on Oct. 13 warning that the U.S. needs to encourage more housing production in order to cut demand and reduce inflation, which was up more than 8% year-over-year in September. “Even with an anticipated fall in home prices in some markets, principally in California, homes will continue to be unaffordable while rents are squeezing non-owners.”
Dr. Robert Dietz, chief economist with the National Association of Home Builders, said that the inflation numbers were “higher than hoped.”
“The Federal Reserve is going to have to go higher in terms of the tightening cycle,” Dietz said in October. He noted that with mortgage rates already climbing from 3% to more than 7%, buyer traffic is down and a lot of buyers cannot afford to enter the homebuying market, especially first-time buyers.
“The market is really more about a reset,” Dietz said on a recent podcast, adding that regulatory costs, a lack of labor and higher lending rates are driving up the costs to build.
“All of that has resulted in this rather strange environment when you combine in the short run and the long run that buyers are being priced out of the market, demand is retreating, but you still have price growth, at least on a national basis,” said Dietz.
Want to learn more about the Fed? Check out our explainer: The Fed: What is it, and what does it do?