“We don’t crash; we’re leveling up,” said Enrico-Crum. “We’re just trying to figure out what that level price is. That’s what everyone is trying to figure out.”
Why is the Fed raising interest rates?
The long-awaited shift — from a red-hot housing market to something more normal — is unfolding across the country as mortgage rates escalate to their 20-year high, propelled in part by the Federal Reserve’s measures to slow the economy and reduce inflation. down. The average rate for a 30-year mortgage, the most popular home loan product, has more than doubled in a year, with many lenders reporting more than 7 percent for such loans. Data released Thursday morning by Freddie Mac may also show mortgage interest rates above 7 percent for the first time since April 2002. A year ago it was 3.01 percent.
The housing market has been cooling since the Fed started raising interest rates this spring. And it cools down clearly faster as the rates increase. US home prices fell in July compared to June, marking the first month-on-month decline since January 2019, according to the closely monitored S&P CoreLogic Case-Shiller National Home Price Index. According to the National Association of Realtors, sales of existing homes fell for the seventh straight month in August to the lowest level since the early pandemic lockdowns. Sales fell 0.4 percent and 19.9 percent from 2021 from July to August. There are even early signs that rents may be falling.
Fed raises interest rates by 0.75 points to fight inflation
“It’s really important to see how vulnerable a sector like housing, which boomed after the pandemic, is more vulnerable,” said Diane Swonk, chief economist at KPMG. “Not only was it supported by low rates, but it was also supported by home working and other services. Some of those shifts won’t go away, but the low rates will.”
Last week, the Federal Reserve raised rates again by 0.75 percentage points, and the bank is expected to raise them two more times before the end of the year. The Fed does not specifically determine the mortgage interest rate, but changes in the benchmark rate — known as the federal fund rate — ripples through the economy, affecting all types of loans. Since the spring, the Fed has hoisted that interest rates from almost zero to between 3 percent and 3.25 percent, causing mortgage interest rates to rise rapidly.
And they may not stop there, especially since the Fed still has a long way to go in fighting inflation. Consumer prices unexpectedly rose in August, while rent and food continued to be the main problems. Equity markets have been tumbling for weeks as policymakers make it clear that they are far from seeing the kind of progress they would need to scale back their interest rate campaign, while central banks around the world are simultaneously raising rates.
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Many economists are forecasting a recession later this year or early 2023, especially as interest rate hikes are delayed and may not fully grab the economy for months. The housing market reacts very closely to any movement in interest rates. But many other parts of the economy don’t.
Asked this week about fears that the central bank won’t have enough time to measure the impact of rate hikes, Charles Evans, president of the Federal Reserve Bank of Chicago, said: “Well, I’m a little nervous about that.
“There are delays in monetary policy and we acted quickly,” Evans said. “We have made three consecutive increases of 75 basis points and there is talk of more to reach that 4.25 percent to 4.5 percent by the end of the year. You don’t leave a lot of time to check out each monthly release a little bit.”
The Fed’s rate hikes are designed to cool demand, and in the housing market, that means getting rid of buyers who were vying for a handful of homes until a few months ago, sending prices to record highs. Fed officials hope their policies housing market without leading to a crash at all. Demand for mortgages has fallen as quickly as interest rates have risen. The total application volume has fallen for six of the past seven weeks, according to the Association of Mortgage Bankers. Refinancing is 84 percent lower than a year ago.
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“The reality I share with my clients is that 20 years ago people bought homes when rates hit 7 percent, and they continue to buy homes when it’s higher or lower,” said Geetesh Kapoor, branch manager of manufacturing at Fairway. Independent Mortgage Company. “If the goal is to buy a home, you can always refinance it later when rates drop.”
But monetary policy cannot solve the other big problem of the housing market: too few houses. Low stocks continue to plague the housing market. The lack of housing is exacerbated by homeowners who are reluctant to sell because of their low mortgage rates. According to Black Knight, 90 percent of borrowers have mortgage rates below 5 percent, and two-thirds have mortgage rates below 4 percent.
“Many would-be sellers are locked into low rates that make moving to a much more expensive mortgage a difficult transition, keeping inventory low,” said Nicole Bachaud, senior economist at Zillow. “This rebalancing puts more power in the hands of a few affluent buyers who can afford to remain active in the retail market, with more time to make critical decisions, less competition and more bargaining power than at any time in recent years. year.”
Estimates for the housing shortage in the country range widely from 1.5 million to 5 million. But it is clear that housing and rent prices will remain high until there are more places for people to live.
Tariff increases make it even harder to close that supply gap. Phil Crone, executive director of the Dallas Builders Association, said higher interest rates come on the heels of ongoing supply chain shortages for everything from windows to garage doors. But Crone hopes the Fed will succeed in raising interest rates and suppressing inflation without other consequences, such as driving companies to lay off people and exacerbating the labor shortage in the construction industry – or the housing market. to demolish completely.
Demand for new homes in North Texas is still strong, especially with the area’s solid job growth, Crone said. There is also a generational component: many millennials are de facto afraid of high interest rates, but Crone’s parents’ generation is used to much higher mortgage payments. In the future, if inflation falls and rates find a middle ground, the market will be much more sustainable.
“Right now it’s just a matter of going from this hyper-acceleration to finding our feet again,” Crone said, “which could take a bumpy six months or so until we find that.”