Path to lower mortgage rates ‘highly uncertain’ after Fed hike
The Fed raised short-term rates by a quarter point today for the first time since July 2023. Mortgage rates, meanwhile, are expected to remain elevated.
Key points:
- The Federal Reserve voted unanimously to raise short-term rates by a quarter point and projected at least one more rate hike this year.
- Fed Chair Kevin Warsh called it a "sober decision," but suggested it was a necessary move to combat sticky inflation.
- Lower oil prices and worker productivity gains could ease inflation and mortgage rates, NAR's chief economist noted, but he said "these developments are highly uncertain" in the near-term.
Mortgage rates in the 7% range may be the new normal as the Fed and bond markets respond to sticky inflation.
The Federal Reserve raised short-term interest rates by a quarter point on Sept. 16, pushing the rate to 3.75-4%. It's the first rate hike since July 2023 and reflects the Fed's focus on tamping down inflation, which was up 3.4% annually in August.
Voting 12-0 for the rate increase, the Federal Open Market Committee was united in its decision. That's a shift from the last Fed vote, which was split 9-3. Most committee members are also projecting at least one more rate hike in 2026.
'Sustaining economic progress'
"The decision we made today was a sober decision," Federal Reserve Chair Kevin Warsh said at a press conference following the announcement. "The Fed has a role in sustaining the economic progress happening in America right now. Those who are least well off have the most to gain from a durable expansion, a solid labor market and stable prices."
The unanimous rate hike vote is a sign that inflation is a significant concern for the Fed. While short-term interest rates don't necessarily push mortgage rates in a particular direction, Treasury yields often do — and Wall Street has been reacting to rising inflation too. Earlier this week, the 10-year Treasury bond reached its highest level in 19 years, pushing the average daily 30-year mortgage rate over 7%.
Limiting the effects of inflation
In his remarks, Warsh acknowledged that a quarter-point rate increase won't lower energy costs, which have spiked during the war in the Middle East.
"We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store. But what we can do and will do is ensure that any changes in relative prices don't broaden out, don't have second- and third-order effects on the economy. That's what we're tasked to do and that's what we will do," Warsh said.
Rate hike the only viable option?
The rate hike was widely expected, and "if Warsh and the Fed did not raise rates, he risked losing credibility," Melissa Cohn, regional vice president of William Raveis Mortgage, said in response to the move.
"Hopefully, the bond market will applaud the hike and react favorably," Cohn said. "There will likely be some volatility after the announcement as traders digest the move and Fed Chair Warsh's comments on inflation and jobs. Then, markets will return to data-watching and focus on oil prices and corporate earnings."
Timeline for lower mortgage rates 'highly uncertain'
Consumers and real estate professionals should be prepared for 30-year rates to remain in the 7% range for a while, according to Lawrence Yun, chief economist at the National Association of Realtors.
"Mortgage rates can come down once oil prices retreat and with a credible plan to reduce the budget deficit," Yun said. "Also, if AI technology boosts worker productivity, then inflation and long-term borrowing rates, like for mortgages, can decline. These developments are highly uncertain, at least in the upcoming months."
In the meantime, elevated rates will "certainly slow home purchases and mortgage refinancing through the rest of the year," said Eric Orenstein, senior director at Fitch Ratings. Existing home sales and mortgage applications were already trending down prior to this week's jump in mortgage rates.
Opportunities for buyers
The recent increases in both short-term and mortgage rates aren't all bad news for real estate, however. The Fed's decision to raise short-term rates signals the committee's confidence in the economy and labor market, while elevated mortgage rates are leading to more inventory, according to Bill Banfield, chief business officer at Rocket Mortgage.
"For anyone house hunting right now, it's a buyers' market in many metros, with inventory at a six-year high and plenty of room to negotiate. That changes the dynamic for buyers, especially those who remember the ultra-competitive market in recent years."