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‘The Worst Is Over’ for Mortgage Rates Despite Another Looming Fed Hike, Experts Say

December 14, 2022 - Originally posted by NextAdvisor


The housing market has slowed down significantly thanks to a dramatic rise in mortgage rates this year. Rates have started to come down thanks to signs of cooling inflation.




















The Federal Reserve is going to raise interest rates this week, but that doesn’t mean mortgage rates are going up.


Experts and financial markets predict the Fed will hike its benchmark short-term interest rate, the federal funds rate, by 50 basis points this week. This comes after the Consumer Price Index was up 7.1% year-over-year in November, a softer than expected number.


“From a mortgage perspective, rates have actually gone down even though the Fed has raised rates. We would expect the worst is over. We think you’re going to see lower rates into the next year despite further rate hikes,” says JR Gondeck, partner and managing director with the Lerner Group, a financial advisory firm.


Experts say the next moves for mortgage interest rates depend more on the tone of Fed Chairman Jerome Powell’s projections for 2023.


“I think a lot of the Fed’s actions have already been baked into mortgage rates. With that said, if the market is surprised to the upside by the Fed’s projections, we could see some movement in mortgage rates to either direction,” says Odeta Kushi, deputy chief economist at First American Financial Corporation.


Mortgage interest rates have been on a wild ride this year, climbing above 7% for several weeks in October and November. Recently, though, signs of cooling inflation have released some of that upward pressure, with the average for a 30-year fixed-rate mortgage now back down to 6.62%, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures.


Amid their ongoing bid to tame inflation, housing costs, which make up a significant portion of consumer spending, are an important metric for the Fed.


Chairman Powell said, in a recent speech, “As long as new lease inflation data keeps falling, we could expect housing service inflation to begin falling sometime next year. Indeed, a decline in this inflation underlies most forecasts of declining inflation.”



How the Fed Affects Mortgage Rates


Mortgage rates aren’t directly correlated to the Fed’s actions. However, they both respond to inflation.


When you take out a mortgage, it’s sold to investors on the bond market in a bundle of other mortgages, known as a mortgage-backed security. With inflation and the rising cost of borrowing money, lenders have had to raise mortgage rates substantially in order to offer a better return to investors interested in mortgage-backed securities.


After inflation came in cooler than expected in October, mortgage rates dipped as the bond market rallied. The Consumer Price Index for November indicates that the highest inflation in 40 years is waning a bit. This a good sign, not only for the Fed, but for mortgage rates as well.


However, experts say the Fed is wary of caving to market expectations too soon and having inflation rears its head again.


“They want to talk tough toward the tone of inflation and keep expectations set going forward, even though the reality is a lot of inflation is backward looking at this point,” Gondeck says. “So, we expect the Fed to raise rates by half a percent but to keep a very tough tone toward keeping rates higher ahead.”


If the Fed can slow housing cost growth, it’s likely there will be a multiplying effect on the rest of the economy.



What Is the Federal Reserve Doing?


Since the start of 2022, the Fed has raised its federal funds rate from zero to 3.75% – one of the fastest rate hikes ever seen from the central bank. It’s all been in the name of taming inflation.


“Inflation is, essentially, too much money chasing too few goods,” says Denis Poljak, co-founder of Poljak Group Wealth Management.


By raising rates, the Fed is making borrowing money more cost-prohibitive. Until they see a sustained downturn in consumer spending, and thus inflation, the Fed has stated they will continue with their rate hiking regime.


Today’s inflationary environment didn’t happen overnight. It’s been gaining traction since the start of the pandemic, and the housing market is a prime example of this.


The pandemic housing boom saw massive price growth as unparalleled demand was met with insufficient supply. Home price growth persisted until its peak in the middle of this year. Since then, prices have been slowly coming down as a result of high mortgage rates curbing demand. The housing market has been stuck in neutral recently, but falling home prices and stabilizing mortgage rates could help bring affordability within reach — especially for first-time homebuyers.



Why Is the Fed Slowing Its Pace?


Up until their December meeting, the Fed has not lifted their foot from the gas pedal. At four consecutive meetings, the Fed hiked its rate by 75 basis points.


The Fed has moved aggressively in raising rates. “And the reality is, it’s working. They started late but they’re catching up to where things are,” Gondeck says.


Still, the Fed must walk a thin line between remaining aggressive and going too far too fast. By opting for a hike of 50 basis points, rather than 75, the Fed is pushing for a soft landing, rather than a full-blown recession.


“This way Powell can continue with his agenda to slow the economy down but help create a softer landing, a more moderate recessionary environment,” Poljak says.


To achieve a soft landing, or a moderate recession, the Fed will continue to keep a close eye on incoming inflation data from the housing market.


“The housing market is the leading indicator of a recession,” Kushi says. “But traditionally, it has also aided the economy in recovering from one.”


What the Fed’s Projections Mean for Mortgage Rates

In their December meeting, the Fed will not only adjust rates but offer projections for the year ahead.


The most recent inflation report offers a glimmer of hope, but it isn’t enough for the Fed to pull back from rate hikes just yet. Until they see hard evidence that inflation is at or below where the federal funds rate is for several quarters, the Fed has indicated they won’t feel confident easing up on rate hikes.


However, further increases may not mean drastic changes for mortgage rates. Signs of cooling inflation are likely to help mortgage rates stabilize at a lower level, albeit higher than previous years.


“I think the rate hike is pretty much already priced into the market. The Fed is going to raise their short term rate by half a percent. But from there, it’s going to matter more what they say about the future, and specifically, the tone they use,” Gondeck says.



See full original article below:


Mortgage Rates: "The Worst Is Over"








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