Mortgage Rates Rise Above Six Percent
For the first time since the Great Recession of 2007/2008, mortgage rates have risen above 6%. And last week the Federal Reserve (the Fed) raised interest rates again to the tune of a very aggressive 3/4 of a point for the third consecutive time. (While many folks think that the Fed controls all interest rates, this is not the case. The Fed only has the power to raise the federal funds rate. This is the interest rate that banks are permitted to charge when they lend money to each other overnight.)
But while the Fed does not directly control any other intertest rates, when they do raise the federal funds rate, other rates are sure to follow (mortgage, interest on your savings accounts, etc.).
Freddie Mac’s 30-year fixed mortgage rose again this week to 6.02% from last week’s 5.89%. (The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac is a publicly traded, government-sponsored enterprise created in 1970 to expand the secondary market for mortgages in the U.S.) In the past year, to date, Freddie Mac’s rate has more than doubled. Other rates offered by banks always follow suit. One year ago, the rate stood at 2.86%.
As rates rise, more and more homebuyers are priced out of the market, as the price of servicing the mortgage each month becomes prohibitive for many. As a result, the recently red-hot housing market has cooled substantially in recent months.
So, why is the Fed raising rates so rapidly? Inflation occurs when too much money is chasing too few goods. The new government programs (Build Back Better, American Rescue Plan, Infrastructure Investment and Jobs Act, Chips and Science Act, Inflation Reduction Act) need to be paid for, so trillions of dollars were created for this purpose. (FYI: Please understand I am not taking any position on the merits of these program or whether they are a good idea. This is a real estate newsletter, not a political one.) Additionally, the supply chain problem has lowered the number of goods consumers can buy which tends to raise prices for the consumer.
The Fed is, therefore, raising interest rates to slow the economy, particularly on big ticket items, such as autos and homes. As stated earlier, as rates rise, less people are in the market for these items. The problem is that when people stop spending, businesses find themselves in trouble, and layoffs are the norm. The country then faces serious risk of a recession, if we are not already in one. Fed chairman, Jerome Powell said recently, “There will be pain.” He is in the unenviable position of fighting inflation but risking a serious recession.
And as the mortgage rates rise due indirectly to the Fed’s actions sales of existing homes have, indeed, fallen for the last six months according to the National Association of Realtors.
While there is some good news in that gas prices have fallen significantly from recent highs, prices are still about 25% higher than a year ago, in August 2021 (See here). And groceries are up about 13% compared to a year ago; autos are up a similar amount.
We can only hope for a soft landing – a gentle, short-lived recession with sharply declining inflation. But, unfortunately, this scenario seems to be less and less likely.