It’s bad enough that home prices in Southern California remain high despite cooling demand, nearly seven times the state’s median income for a family of four.
Making matters worse, though, is the rapid rise in mortgage interest rates. The 30-year, fixed-rate mortgage rate has doubled in nine months, topping 6% last week for the first time since George W. Bush became president.
This is not only painful for people trying to borrow money to buy a home, but also for homeowners with adjustable-rate mortgages, whose monthly payments increase in interest rates each year.
Two reasons for the increase are inflation and the efforts of the Federal Reserve Board of Governors. The Fed has raised the short-term “federal funds” rate (the interest that banks charge each other for overnight loans) four times this year, and is expected to do so again on Wednesday.
David Wilcox, senior economist at the Peterson Institute for International Economics and Bloomberg Economics, said a key factor in mortgage interest rates is how much inflation lenders expect to see over the life of the loan. And given the Fed’s message and continued inflationary pressures in the economy, financial markets are anticipating a higher pace for interest rates in the coming years than before 2022.
Should you expect to pay more for a new mortgage after the Fed imposes its latest hike? Perhaps, but there is no simple cause and effect here. Instead, the Fed’s actions affect mortgage rates indirectly by influencing lender and financial market expectations.
Consider what happened after the Fed raised its target interest rate by 0.75 percentage points in June, the largest increase yet. Since 1980: mortgage The rate has decreased. They began climbing again a few weeks later in anticipation of the Fed meeting in July, when it raised its target for a second time by 0.75 percentage points. And after that, mortgage interest rates fell again.
This illustrates how financial markets are ahead of the Fed, reacting to expectations rather than waiting for the central bank to act. And when the Fed meets those expectations, “you usually see some sort of relief rally,” said Robert Heck, vice president of mortgages. MortyAn online mortgage broker.
The Fed is trying to break the economy’s inflationary fever without pushing the country into recession, but the usual indicators of economic health are confusingly misleading. Gross domestic product is falling, but unemployment remains low; Corporate profits Basically hard; Consumer confidence is restored; and consumer spending began to growSlowly though.
Fed Chairman Jerome H. Powell has repeatedly said the Fed will raise interest rates until inflation is under control. Even so, some lenders and investors looked at the economy in July and thought the Fed would take its foot off the fiscal brake, Heck said.
That changed in August, when Powell and other Fed officials reiterated their determination as Powell Put it on August 26, “Keep doing it until we’re confident the job is done.” Intentionally or not, the statement echoes the title Memoirs of former Fed Chair Paul Volckerwho used high interest rates to get the US out of double-digit inflation in the 1980s.
“I think the Fed has succeeded in communicating more clearly, and the market has accepted more, and more thoroughly, their determination to fight inflation and win the war,” Wilcox said.
At the same time, Wilcox said, “the market has concluded that the Fed needs to do more to win that fight.”
Recent data show that inflation is broader and more stubborn than previously believed, and the labor market is “remarkably strong,” he said.
Heck said no newly released economic data pointed to a rate cut.
Then a steady rise in mortgage interest rates since early August.
Another reason for the increase, Heck said, is that the Fed may raise the federal funds rate by a larger amount on Wednesday — 1 to 1.25 percentage points. “I think this meeting was probably the one we were least prepared for, in terms of knowing what was going to happen,” Heck said.
A key will be the market response.”Dot plot,” or charts showing how much Fed officials expect the federal funds rate to rise or fall over the next few years. Powell said he expects the federal funds rate to reach 3.4% by the end of this year — going into Wednesday’s meeting, it was in the range of 2.25% to 2.5%.
Another important consideration, Heck said, will be what Fed officials say about the central bank’s holdings of mortgage-backed securities. Earlier in the year, the Fed announced it would unwind those holdings by about $35 billion starting this month. If it decides to reduce its holdings further, it will reduce demand for mortgage-backed securities, leading to higher interest rates through the internal logic of credit markets.
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