In response to runaway inflation, the Fed has been hiking interest rates all year, and there’s nearly universal agreement that the final two months of 2022 will bring more of the same.
With mortgage rates already at their highest level since 2008, it’s all but certain that borrowing money will get even more expensive as the new year approaches.
“Mortgage rates continue to climb, nearing 7% by the end of October,” said Danielle Hale, chief economist for Realtor.com. “Until the Fed can wring inflation out of the economy, and especially as long as economic data signal a healthy labor market, there will be upward pressure on mortgage rates.”
Count on Another Hike Next Month — and Maybe the Month After That
The industry consensus is that the Fed will raise its benchmark overnight interest rate by three-quarters of a percentage point for the fourth consecutive time, at the start of November. That would bring the rate up to a range of 3.75% to 4%.
But high political drama will overshadow the moment, and there’s a whole lot of gray area as to what comes after that.
“The early November Fed meeting won’t include updated projections and immediately precedes the midterm elections, so I expect it to have a more muted impact than usual,” Hale said. “As a result, economic signals will be more important. The Fed is likely to increase rates by 75 basis points in November, and may pursue a similar-sized hike in December. The exact size of the December hike will depend on the latest economic data, and the decision will be announced the day after the December CPI report and after early holiday retail sales results, so we may see greater volatility in mortgage rates that week.”
Even the Bargains Are Bargains Only vs. Record Highs
Although expensive loans are stifling demand, no one should expect to get a great deal on a house this winter.
“Home asking prices continue to ease from their seasonal high this summer but have enough momentum from earlier in the year to remain up on a year-over-year basis through November,” Hale said. “Even though home price gains are slowing, when combined with higher mortgage rates, today’s home shoppers are paying much more to buy a home with a mortgage than they did one year ago. Bargain hunters may be able to snag a home below asking price, as price cuts have risen sharply compared to one year ago, but the discount is coming off of a much higher original asking price.”
Expect 2022 To Close With Rates in the Low 8s to High 9s
With mortgage rates around 7% now, the smart money says further Fed action will force them up by at least one percentage point by year’s end.
“Given the trajectory of mortgage rates over the last several months, we are anticipating rates to reach the low 8s by the end of this year,” said Christina McCollum, Washington regional manager for Churchill Mortgage. “That shouldn’t be a surprise to anyone who has followed the market through the latter half of the year, but [it is] still staggering when you consider how drastic the rise has been from the record lows we saw during the peak days of the pandemic.”
Despite the rise in rates, McCollum anticipates heavy activity in December, which is always one of her best months — and her closings in October and November suggest that will stay the same.
“Rates should drop at some point next year as inflation slows down,” she said. “But that relief likely won’t be reflected until the summer.”
The low 8s, however, might be wishful thinking if the Fed doubles down again in December, as Hale suspects.
“Thirty-year Mortgage rates will soar to 9.75% before the end of the year,” predicted Shri Ganeshram, CEO and founder of awning.com, a real estate brokerage for investors. “The Fed will raise the interest rate as winter approaches, international trade slows down and political tensions rise.”
Fed Rate Hikes Are Only Part of the Equation
The Fed’s aggressive anti-inflation actions hold the most influence over mortgage rates by far — but other variables could throw unforeseen curveballs into the equation this winter.
“The economy is still growing steadily, which means that more people may be applying for mortgages or refinancing their existing loans,” said Shaun Martin, owner of Cash For Houses in Denver. “This will cause a slight increase in demand for new mortgages and refinanced loans, which will also increase demand for money from banks — and subsequently increase interest rates.”
Also, the onset of a widely predicted recession could force lenders to tighten supply.
“If there’s an economic downturn or some other kind of negative economic event that causes uncertainty in the market,” Martin said, “this could cause lenders to raise their standards on who they’ll lend money to and what kinds of loans they’re willing to make available at any given time — which would mean higher interest rates overall.”
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