According to data released by Freddie Mac, mortgage rates reached a 16-year high in October of 2022. The average rate for a 30-year fixed mortgage is now 6.92%, up from 6.70% from September. This is a huge jump compared to November of 2021, when they were at their lowest at 2.98%.
The reason for the sharp increase in mortgage rates is the Federal Reserve’s aggressive stance against inflation. Every month since June, $80 billion worth of Treasury bonds have been acquired by the Federal Reserve, in addition to $40 billion worth of mortgage-backed securities. This quantitative easing program is designed to keep interest rates low and encourage borrowing and spending.
However, the Fed’s actions have had the opposite effect on mortgage rates. As bond prices have fallen, yields have risen, and mortgage rates have followed suit. The Fed is now caught in a difficult situation; if it continues its quantitative easing program, it risks further driving up mortgage rates and making it more difficult for Americans to buy homes. If it stops its program, however, it risks stalling the economic recovery.
The Impact of Higher Mortgage Rates
Rising mortgage rates will have a number of impacts on both the housing market and the economy as a whole. First and foremost, they will make buying a home more expensive for buyers who are already stretched thin by high home prices. This could lead to a slowdown in home sales, which would in turn put downward pressure on home prices. This also encourages property sellers to hold on instead of selling, which will keep worsening the already-short inventory of available homes on the market.
Higher mortgage rates will also make refinancing more expensive for homeowners who took out loans with low-interest rates during the pandemic. Mortgage rates were at an all-time low in November of 2021, as the Federal Reserve battled against deflation. The average 30-year fixed rate was just 2.98%, and it was more affordable for Americans to buy a home. In fact, there was a boom in the housing market at the start of the pandemic, with lots of desperate sellers and the shift to work-from-home arrangements. Now that the rate is at a 16-year high, this could lead to an increase in foreclosures as people struggle to keep up with their monthly payments. This is in line with the prediction made by Goldman Sachs about a possible downturn in the housing market this 2023.
The low-interest rates were made possible by the Federal Reserve’s aggressive quantitative easing program, which was designed to keep borrowing costs low and encourage spending. However, the program had the opposite effect on mortgage interest rates, as bond prices fell and yields rose. The Fed is now in a difficult situation; if it continues its quantitative easing program, it risks further driving up mortgage rates and making it more difficult for Americans to buy homes. If it stops its program, however, it risks stalling the economic recovery.
Finally, higher mortgage rates means higher monthly payments for people who have adjustable-rate mortgages or home equity lines of credit that are tied to changes in interest rates.
What This Means to Mortgagors
Without all the complicated financial terms, all this means for people who took out a mortgage, is that they have to pay more on their mortgage. This is because when the Federal Reserve buys bonds, mortgage rates go up.
While most buyers have fixed-rate mortgages that aren’t impacted by rising rates, about 11% of all mortgages have adjustable-rate mortgages. This type of mortgage has rates that can increase or decrease depending on changes in a benchmark rate, but they usually start out low. For people who took out their adjustable-rate mortgage a decade ago and only made small payments, this is the worst scenario. However, high interest rates also led to an increase in people who choose to take out an adjustable-rate mortgage instead of a fixed-rate mortgage. If you take out a fixed-rate mortgage now, you would have to pay a hefty sum on interest. On the other hand, if you take out an adjustable-rate mortgage now, there is a possibility that rates will be much lower than they are now somewhere down the line — or maybe they will be much higher. It’s a gamble that no one can accurately predict.
The sharp increase in mortgage rates is sure to have an impact on both the housing market and the economy as a whole. Homebuyers will find themselves having to stretch even further to afford a home, while homeowners with adjustable-rate mortgages or home equity lines of credit will see their monthly payments go up. It remains to be seen how all of this will play out, but one thing is certain: things are about to get interesting.