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Mortgage rates: The Federal Reserve is expected to hike rates again this week, but mortgage rates are tipped to stay as they are.
Mortgage rates have seen several ups and downs this year, topping 7% for weeks in October and November.
However, signs of a cooling down of inflation have eased mortgage rates.
According to a study by Bankrate (owned by Red Ventures in addition to NextAdvisor), the average for a 30-year fixed-rate mortgage returned to 6.62%.
Partner and managing director of financial advisory firm Lerner Group, JR Gondeck, is bullish on interest rates.
“From a mortgage perspective, rates have actually gone down even though the Fed has raised rates. We would expect the worst is over,” said Gondeck.
“We think you’re going to see lower rates into the next year despite further rate hikes.”
Meanwhile, analysts and financial markets are anticipating the US Federal Reserve to raise its benchmark short-term interest rate (the federal funds rate) by 50 basis points this week.
However, experts say the next steps for mortgage rates depend more on the tone of Fed Chairman Jerome Powell’s 2023 forecast.
American Financial Corporation Deputy Chief Economist Odeta Kushi suggested it was just expectations.
“If the market is surprised by the Fed’s projections, we could see some movement in mortgage rates,” said Kushi.
“Whether that surprise is to the upside or the downside.”
Housing costs are already a significant part of consumer spending.
The housing market has been a critical indicator in the Fed’s ongoing efforts to curb inflation (7.7% year-over-year in October).
Since early 2022, the Fed raised the federal funds rate from 0 to 3.75% – one of the central bank’s fastest rate hikes.
The efforts were an attempt to curb the ongoing inflation.
Denis Poljak, the co-founder of Poljak Group Wealth Management, provided a unique insight into inflation, saying:
“Inflation is, essentially, too much money chasing, too few foods.”
The Federal Reserve makes it more challenging to borrow money by raising interest rates.
According to the Fed, they will continue to raise interest rates until they see a sustained decline in consumer spending and inflation.
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The current inflationary environment did not appear overnight.
It gained momentum from the start of the 2020 pandemic, with the real estate market being a clear example.
The pandemic boom in the housing market led to massive price increases as demand failed to meet supply.
In addition, house price growth continued until it peaked in the middle of the year.
Since then, prices have slowly come down as high mortgage rates have dampened demand.
In addition, the housing market has been in neutral territory lately.
However, declining home prices and stabilizing mortgage rates could put affordability out of reach, especially for new buyers.
The Fed & mortgage rates
Despite the parallelism, mortgage rates are not directly related to Federal Reserve actions.
Instead, they respond to inflation.
When people take out a mortgage, it is sold to investors in the bond market as part of a bundle of mortgages known as mortgage-backed securities.
Due to inflation and rising borrowing costs, lenders have had to raise mortgage rates to provide investors with better-yielding mortgage-backed securities.
As inflation eased in October, mortgage rates fell, and the bond market recovered.
The housing market represents a significant section of consumer spending.
If the Fed slows the growth in the cost of housing, it will probably have a domino effect on the economy.
“As long as new lease inflation keeps falling, we would expect housing service inflation to keep falling sometime next year,” said Jerome Powell.
“Indeed, a decline in this inflation underlies most forecasts of declining inflation.”
The Fed’s pace
The Federal Reserve consistently maintained rate hikes throughout its December meeting.
The Fed has raised rates aggressively by 75 basis points in four consecutive meetings.
“And the reality is, it’s working,” said JR Gondeck. “They started late, but they’re catching up to where things are.”
Despite the progress, the Fed must find a balance between remaining aggressive and acting too quickly.
The decision to raise rates by 50 basis points instead of 75 suggests the Fed is pushing for a soft landing rather than an outright recession.
“This way, Powell can continue with his agenda to slow the economy down but help create a softer landing, a more moderate recessionary environment,” says Poljak.
The Fed needs to watch incoming housing market inflation data to arrive at a soft landing or moderate recession.
“The housing market is the leading indicator of a recession,” says Odeta Kushi.
“But traditionally, it has also aided the economy in recovering from one.”
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At its December meeting, the Federal Reserve will adjust rates and offer forecasts for next year.
The latest inflation report shows a positive sign, but the Fed needs more to curb rate hikes.
Additionally, the Fed has indicated it will be cautious about easing rate hikes until it sees evidence that inflation has been around or below the federal funds rate for several quarters.
However, additional hikes may not lead to dramatic changes in mortgage rates.
Signs of cooling inflation will likely stabilize mortgage rates at lower levels.
“I think the rate hike is pretty much already priced into the market. The Fed is going to raise their short-term rate by half a percent,” said Gondeck.
“But from there, it’s going to matter more what they say about the future, and specifically, the tone they use.”
‘The worst is over’ for mortgage rates despite another looming Fed hike, experts say