Housing Market 2023: Why Are Fed Rates No Longer Impacting Your Mortgage Rates?

Happy woman signing a contract while being with her husband on a meeting with real estate manager int he office.
Drazen Zigic / Getty Images

While the Federal Reserve is expected to continue its streak of rate hikes to mitigate inflation, per Reuters, mortgage rates for the year remain at a high of 6.81% as of July 6. This is considerably high, but it’s actually decreased from October of last year (which held at 7.08%).

A flurry of economic factors converged to impact the U.S. housing market in unforeseen ways. Outside of The Federal Reserve’s decisions, there are other aspects pulling on mortgage rates. 

  • Housing supply and demand.
  • Inflation.
  • Uncertain economic outlooks.
  • 10 Year Treasury yields.

While the rates set by the Fed often impact mortgage rates, the other economic conditions might cause the two to drift in ways that even experts couldn’t predict. 

Why It’s Important

When the Fed raises interest rates, we expect mortgage rates to rise along with them. The typical impact of changes from the Fed on mortgage rates resembles a chain reaction.

The Fed raises rates which leads mortgage rates to rise. Then, home prices decrease to account for the higher cost of home ownership. Once homebuying is more expensive, demand decreases.

After 10 consecutive rate hikes since March 2022 to help quell inflation, the housing market is responding to rising Fed rates with slightly reduced mortgage rates. Home prices have also decreased by 8.9% in the first quarter of 2023.

So what’s causing mortgage rates to veer away from the expected chain of events?

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Housing Supply and Demand

To understand why the housing market may not be behaving the way it’s expected, it may be worthwhile to consider what happened before the series of rate hikes.

  • The Fed maintained a 4-year period of slow rate increases from 2015 to 2018, when we saw home prices and demand climb.
  • During the pandemic, the Fed cut rates drastically (to almost zero) in 2019 and 2020 to boost the economy.
  • Homebuyers locked in low rates (between 2.65% to 4.45% on average) on mortgages and refinances despite steadily rising home prices and a dwindling supply of homes.
  • The Fed started raising rates again on March 17, 2022, which was the first of nearly a dozen rate hikes between then and May 4, 2023.

As of July 6, 2023, the average 30-year fixed mortgage is at 6.81% — the highest it’s been this year. These high rates deter potential sellers currently enjoying low mortgage rates as well as buyers with tight budgets. That further constricts the supply of homes for sale while minimizing demand. Typically, such a scenario should drive up prices for remaining homes on the market — but not this time.

Instead, current data from the Federal Reserve Bank of St. Louis shows that housing prices have dropped by 8.9% in the first quarter of 2023 as compared to a median home price of $479,500 in the last quarter of 2022.

Concerning the Current Real Estate Market

Home prices are down, mortgage rates are up. Supply and demand are at a standstill and The Fed is expected to raise rates again this July, as Reuters indicated. The U.S. housing market exists in a unique economic environment that isn’t entirely predictable. Although the nation’s mortgage rates are connected to the Fed’s rate hikes, other factors have created uncertainty and unpredictability.

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