How high will mortgage rates go? It depends on the Fed’s inflation fight. | SehndeWeb

This is a record sprint for the most popular variety of home loans, and the starter’s shot went off before the Fed even stepped in. As recently as November, the 30-year rate was an eyelash of 3%, according to mortgage buyer Freddie Mac.

“We’ve never had such a dramatic increase in such a short time,” said Luke Tilley, chief economist at Wilmington Trust.

Why has the cost of borrowing for a home soared so fast when the Fed is at the start of its planned round of rate hikes aimed at curbing runaway inflation. Why does the Fed want mortgage rates to rise? How much will mortgages cost?

Here’s a look at why mortgage costs are rising and what might be in store for anyone looking to buy or sell a home. Spoiler alert: Experts say the extraordinary expansion in house prices may slow, but they are unlikely to fall outright.

Mortgage rates don’t rise in a vacuum

Inflation has snuck up on most economists, including those of the Fed, disguised as temporary byproducts of COVID-related disruptions to the labor market and global product supply chains. But by the end of last year, a sense of sinking had set in: rising consumer prices would be a problem for some time. In December, Fed Chairman Jerome Powell signaled that higher rates would likely be needed soon to calm things down.

Rising interest rates tend to slow the economy — and keep inflation in check — by making it more expensive for businesses to borrow to buy new equipment and hire more employees. They also make it more expensive to buy a home, pay for goods and services on credit, or take out a car loan.

The federal The funds rate is the most important loan rate that any real person will ever pay. The Fed’s main tool for controlling the money supply, it is used by banks to lend to each other on a day-to-day basis – essential to the financial system, invisible to us.

But the funds rate influences, directly or indirectly, a wide range of other lending costs, from business loans to credit cards to the amount of interest the federal government pays investors who buy its debt. As the Fed telegraphed its next steps, rates began to rise across the board.

On March 16, the Fed made its quarter-point move. On the day, Powell also left no doubt that it would take multiple rate hikes this year and next to bring inflation under control – even more fueled by the impact on commodity prices. food and energy from the Russian invasion of Ukraine. The central bank’s preferred gauge of inflation, called the personal consumption expenditure index, hit 6.4% in February, more than triple its long-term target of 2%.

That’s when soaring mortgage rates kicked into high gear.

Monitoring of 10-year Treasury bills

Mortgage rates are primarily determined by the yields of 10-year US Treasury bonds. The widely followed barometer reflects the expectations of the financial world on the direction of interest rates, economic growth and inflation. By extension, mortgage fees too.

Since the start of the year, the 10-year Treasury yield has risen from 1.51% to 2.84%, again in anticipation of the Fed’s tightening plans. Mortgage rates followed suit.

The rate on a 30-year fixed mortgage in Massachusetts rose to an average of 5.05% on Wednesday, from 3.3% in early January, according to Bankrate.com. Local rates on 30-year jumbo loans have made a similar move, and the Massachusetts average on a 15-year fixed mortgage is 4.2%, down from 3.5%.

Gain brings pain

Several key housing market reports have been released this week. All tell a familiar story: high prices that continue to rise and a precious little stock to sell despite it being sales season.

Homebuilder confidence fell for the fourth consecutive month in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index released Monday.

“The [single-family] The housing market is facing an inflection point as a rapid and unexpected increase in interest rates, rising house prices and escalating material costs have significantly reduced housing affordability conditions, in especially in the crucial entry-level market,” said Robert Dietz, chief economist at the homebuilders association. .

My colleague Tim Logan reported Tuesday that the median price of a single-family home in the Boston area rose 9.4% to $789,500 in March from a year earlier, according to the Greater Boston Association of Realtors. . The increase came as the number of sales fell 7.9%.

And on Wednesday, the National Association of Realtors said US existing home sales fell 2.7% in March from February and inventories were down 9.5% from a year ago. a year.

The combination of exorbitant prices and rising mortgage rates is expected to eat into the housing market. Consider: The monthly mortgage payment (principal and interest after a 20% down payment) on the Greater Boston median price home has increased by over $710 to $3,410 in 2022. That’s over $8,500 per year.

Numbers like this lead most market watchers to expect price gains to moderate, but nothing like the 2007 plunge. Homes remain more affordable today than they were during the housing bubble, for compared to median household incomes.

Investors are betting the fed funds rate will hit around 2.5% by the end of the year, based on financial futures. That’s higher than the Fed’s median projection of about 1.9%.

Tilley, the Wilmington Trust economist, thinks Wall Street is too pessimistic.

Inflation was already slowing before the Fed raised its rate, he said, and will decline even further as the central bank tightens further throughout the year.

“The Fed won’t need to raise rates as high as many expect,” Tilley said.

This would moderate any further rise in mortgage rates. But without a significant change in stocks on the market, it will be nearly impossible to afford a home, no matter where borrowing rates go next.


Larry Edelman can be contacted at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.

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