Pity those first-time house buyers.
On Wednesday, the U.S. Federal Reserve raised the benchmark interest rate by 75 basis points to a 1.5% to 1.75% range, the biggest increase since 1994 as it tries to tame rising inflation, which has reached a 40-year high.
Eric Finnigan, a director at John Burns Real Estate Consulting, wrote on Twitter TWTR, +1.12% that mortgage rates rising from 3% at the start of this year to 6% effectively rules out 18 million households from qualifying for a $400,000 mortgage.
To translate that to the prospects of would-be homeowners: On a $400,000 loan, a 30-year, fixed-rate mortgage at a 3% interest rate would cost homebuyers approximately $1,686 a month, excluding taxes and other fees. That equates to $607,110 in total (with $207,110 in interest).
Compare that to the current environment: At 6% that same mortgage would cost approximately $2,398 a month ($863,353 in total with $463,353 interest), a 42% increase in overall monthly repayments on the lower rate.
The 30-year fixed-rate mortgage averaged 5.78% for the week ending June 16, up 55 basis points from the previous week, Freddie Mac said on Thursday. That was the biggest one-week increase since 1987, said Sam Khater, Freddie Mac’s chief economist. (One basis point is equal to one hundredth of a percentage point.)
“The old maxim ‘desperate times call for desperate measures’ appears to have come into play with this latest rate move,” said Mark Hamrick, senior economic analyst at Bankrate.com said in response to the Fed’s 75-basis-point hike.
“The cost of borrowing is becoming more expensive, particularly for those with variable rate products,” he said. Conversely, those who locked in at a 30-year rate last year at more than half the current rate will be breathing a sigh of relief.
The rise in mortgage rates in recent weeks was likely baked into the expected 75-basis-point hike, but they say interest rates remain on an upward trajectory, said Holden Lewis, home and mortgage expert at personal-finance site NerdWallet. “The 30-year fixed-rate mortgage surged past 6% in the last week, its highest level since November 2008, when the economy was crawling out of the financial crisis,” he said. “The May inflation report provided the final shove.”
“‘The Fed faced another difficult choice.’”
The Fed faces a difficult balancing act: taming rapid inflation — running at 8.6% through May on the year through, according to the Consumer Price Index — without pushing gross domestic product growth into negative territory.
Rates won’t have reason to fall with inflation at these levels, Lewis added. “Mortgage rates tend to go up and down in anticipation of Fed rate moves,” he said, adding that he doesn’t expect another dramatic spike in the weeks ahead.
About half of buyers are pressing pause on their plans to buy a home, choosing to wait for six to 12 months before restarting the process, according to a recent survey of 900 realtors by real estate tech startup HomeLight.
That sentiment is showing up elsewhere. The Market Composite Index, a measure of mortgage loan application volume, fell to its lowest level in 22 years, the Mortgage Bankers Association (MBA) said earlier this month.
A possible silver lining: “It’s possible that this large increase could be somewhat of an over correction on the part of lenders, and, as a result, it may fall somewhat over the coming weeks as lenders better adjust to the current high inflation environment,” said Jacob Channel, senior economist at Lending Tree, an online lending marketplace headquartered in Charlotte, N.C.
Rising rates aren’t all bad news, he added. “Less demand for housing could help to alleviate some of the housing supply crunches that are being felt across the country. Though it’s unlikely that home prices will majorly slump, an increase in housing supply will likely significantly slow home price growth and give would-be buyers more housing options to chose from.”
Markets are rattled by the Fed’s efforts to raise interest rates to tame inflation without pushing the U.S. economy into recession, which would likely take a toll on the housing market. On Thursday, the Dow Jones Industrial Index DJIA, -0.13%, S&P 500 SPX, +0.22% and tech-heavy Nasdaq COMP, +1.43% had all sunk into the red after ending in positive territory on Wednesday in the wake of the Fed’s 75-basis-point hike.
The slowdown is already showing up in the real-estate brokerage industry. Redfin RDFN, +7.60% CEO Glenn Kelman wrote in a blog post on Tuesday, in which he asked 8% of this company’s staff to leave, “With May demand 17% below expectations, we don’t have enough work for our agents and support staff.”
He said the business has had to downsize its staff as “mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive.”
Analysts were not surprised by the Fed move. “The Fed faced another difficult choice,” said Ben McLaughlin, president of the online savings platform SaveBetter.com, adding that “markets have been rattled lately, so the Fed must walk a narrow path to avoid a jolt so pronounced that it risks tipping the U.S. economy into recession.”
Indeed, he said it was fulfilling expectations with its third consecutive rise in the Fed Funds target rate since March 2022.
“While we may see some ebbing and flowing of rates over the coming weeks and months, it’s possible that rates will still end up higher than they are today by year’s end,” Channel said.
Speaking of Fannie Mae’s FNMA, +0.61% latest 30-year mortgage rate released Thursday morning, he added, “Today’s latest mortgage rate figures are just another reminder of how painful getting high inflation under control can be.”
The Dow Jones Industrial Average DJIA, -0.13% closed lower Friday, while the tech-heavy Nasdaq Composite COMP, +1.43% and S&P 500 SPX, +0.22% clung to positive territory. All three major stock benchmarks booked a third straight week of losses, with the S&P 500 seeing its worst weekly percentage drop since March 2020, according to Dow Jones Market data.