Mortgage Rates Above Seven Percent
The 30-year fixed mortgage rate reached 7.19% as of July 24th, up for the fourth consecutive week. The rate exactly a year ago was 5.51%. It’s now the highest it’s been since January 2000. Housing market watchers expect elevated rates to remain high in the near term due to continuing market uncertainty, in addition to the possibility that the Federal Reserve (the Fed) will continue to fight inflation through at least one more rate hike during 2023 (probably at the Feds July meeting this week). But many of these same experts think rates will begin to decline later in the year. The Feds only power concerning interest rates is its ability to determine the rate that banks are permitted to charge each other on overnight loans. While other interest rates (other than the overnight rate) are set by investors in the markets, such as in the government-bond market, the Fed’s decisions on those overnight bank rates affect other interest rates, including mortgage rates.
Though the Fed skipped a rate increase at its June meeting for the first time in eleven months, the consensus is that the new projection implies at least one more rate hike before the end of 2023. An old press release from the Fed concerning interest rates states: “the Fed considers a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments …” when considering adjusting interest rates. In terms of the July meeting, as stated above, the Fed will monitor economic conditions first before deciding on any rate adjustment. But it is widely believed the Fed will raise rates again at its July 15th-16th meeting in an attempt to restrain inflation.
Some experts disagree with the Fed raising rates again: “The rate hikes from earlier months have yet to exert their force at a time when inflation has already decelerated to 4%,” said Lawrence Yun, chief economist at the National Association of Realtors (NAR). “There is no need to consider raising interest rates.”
Indeed, for the remainder of 2023, experts from Fannie Mae, Realtor.com, Freddie Mac, NAR, Bank of America, and the Mortgage Bankers Association predict rates for the remainder of 2023 to be closer to 6%, or below, agreeing with Mr. Yun in that the previous rate hikes by the Fed has not yet had the time to work its way through the economy and lower inflation even further.
The main reasons home sales are declining sharply is that mortgage rates above 7% keep many potential buyers out of the market. But there is another reason. People who currently own homes and have mortgages when rates were very low (3 to 4%), see no reason to sell their homes for the privilege of paying above 7%. The difference in those rates can add many hundreds of dollars to monthly mortgage payments.
On Wednesday, July 13th the U.S. government reported that inflation at the consumer level rose 3% in June from a year earlier, marking its lowest point since early 2021, though it remains above the Fed’s 2% target.
“Incoming data suggest that inflation is softening, falling to its lowest annual rate in more than two years,” said Sam Khater, Freddie Mac’s chief economist. “However, increases in housing costs, which account for a large share of inflation, remain stubbornly high, mainly due to low inventory relative to demand.” Secondly, mortgage rates are more than double what they were two years ago. As a result, sales of previously existing homes were down 20.4% from a year earlier. This was the tenth consecutive month of annual declines of 20%, or more according to the National Association of Realtors.