Is the Housing Market Ready for the Federal Reserve’s Interest Rate Hike? Here’s What You Need to Know
Written by
David Nadelle
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Sean Fisher
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In its yearlong battle to fight persistent high inflation, the Federal Reserve raised its benchmark interest rate on May 3 by a quarter point, marking the tenth hike made by the central bank since Mar. 17, 2022, and sparking debate by experts on how it will impact the various economic sectors and the depressed housing market.
Since reaching a 20-year high in Oct. 2022, mortgage rates have dipped slightly. After the Fed’s rate hike announcement last week, mortgage rates decreased just under a tenth of a point, according to Mortgage News Daily (MND). For the week ending May 5, the average for a 30-year fixed-rate mortgage was 6.50%, down from 6.59% on April 28. Average rates for a 15-year fixed-rate mortgage dropped from 5.98% to 5.94% over the same period.
The 0.25% rate increase takes the Fed interest rate to a target range of 5%-5.25%, the highest since August 2007 and well above its 2% annual target. Consequently, the mortgage rate has doubled in just over a year.
However, as the Fed’s decision to raise the rate was expected, mortgage rates won’t be significantly affected, said Redfin Deputy Chief Economist Taylor Marr. Had the Fed paused the series of hikes on May 3, it may have influenced a dip in long-term bond yields and consequently, relaxed mortgage rates.
“The impact on mortgage rates will be what ultimately determines if the housing market gets a boost or is dampened further,” noted Marr.
In spite of ongoing recession fears, most experts don’t expect a housing crash in 2023 but they do expect the market to remain uncomfortably choppy until the economy steadies and the Federal Reserve starts to lower its federal funds rate, which will eventually cool the mortgage market.
“Mortgage rates are likely to descend lower later in the year as the consumer price inflation calms down and changes the thinking of the Fed from tightening to possibly loosening the monetary policy,” said the National Association of Realtors’ chief economist Lawrence Yun.
When the starting point to relief will be is anyone’s guess, but many are looking to summer and to a potential pause in Federal Reserve rate hikes starting in mid-June.
As CNBC reported, at the Fed news conference following the May rate increase announcement, Chairman Jerome Powell claimed that “a decision on a pause was not made today,” but pointed out a “meaningful” change in language between the March and May Federal Open Market Committee (FOMC) policy statements.
Observers are taking the omission of the sentence “The Committee anticipates that some additional policy firming may be appropriate,” from May’s policy statement as a hint that the Fed is planning on ceasing interest hikes when the FOMC next meets.
Powell identified the change in policy statement but didn’t elaborate. “Inflation has moderated somewhat since the middle of last year, nonetheless inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go,” he told reporters.
Whether that will be enough to get consumer confidence back on track is another story. The Conference Board Consumer Confidence Index fell to 101.3 in April from 104.0 in March.
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“Consumer confidence, which dipped to a nine-month low last month, could be the most important metric to watch,” said Lisa Sturtevant, chief economist at Bright MLS. “How people are feeling about economic uncertainties could be the key driver of what the housing market looks like in the second half of the year.”
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