Jul 26 2023

Inflation hits 2-year low, but Fed hikes continue

fed rate increase
fed rate increase

What does another Fed rate increase mean for homebuyers? Find out where mortgage rates are heading.

After a brief pause, the Federal Reserve just announced another Fed rate increase. Though inflation recently hit a two-year low, the Federal Reserve’s work isn’t done yet.

Still, an end may be in sight.

To reach the Federal Reserve’s goal of 2 percent inflation, Mary Daly, President of the Federal Reserve Bank of San Francisco, said several more hikes might be needed. But much of this depends on the data. If inflation keeps cooling, we could see another rate pause in a few months’ time.

How does a Fed rate increase impact you?

The Federal Reserve, otherwise known as the U.S. central banking system, began raising its benchmark rate in early 2022 in an effort to curb historic surges in inflation. When the benchmark interest rate goes up, it causes the cost of many types of borrowing to rise.

Effects of a Fed rate increase include:

Short-term -

  • ARMs. Adjustable Mortgage rates will increase.
  • Bank accounts. Savings account rates may slowly rise, providing financial benefits.
  • CDs. Certificate of deposit payout rates may also rise, at varying levels.
  • Credit cards/car loans. Rates on auto loans and credit cards are likely to move higher.
  • HELOCs. Home Equity Loan and HELOC rates may also gradually increase. 

Long-term -

  • Fixed-Rate Mortgages. A Fed rate increase doesn’t affect fixed rates directly, but it can set a chain of events into motion that has the potential to cause mortgage rates to rise. 
  • Long-term bonds. Bond yields may decrease, typically inversely related to interest rate hikes. 

In the past, the easiest way to tell what direction mortgage rates were heading in was to look at the 10-year Treasury bond. Mortgage rates have stayed about 1.7 percent higher than the 10-year Treasury bond yield since the Great Recession.* When the Treasury yield began to climb in 2022, it brought mortgage rates with it.**

But the recent Fed rate increase cycle has widened the spread between the two. While some economists believe the gap between these numbers will get smaller, it’s unlikely it will return to 1.7 percent anytime soon.* Closing this gap, even slightly, could help to bring mortgage rates down too.

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Have mortgage rates hit their peak?

High inflation has contributed to higher mortgage rates. But as inflation falls from it’s peak, forecasts suggest the same might be true for mortgage rates.**

“Low inflation means low mortgage rates. Therefore, decelerating consumer prices could steadily lift home sales and increase home production in a few months,” Lawrence Yun, Chief Economist for the National Association of REALTORS®, said.

For homebuyers feeling stuck, this is encouraging news.

Though no one can guarantee where mortgage rates will land, the possibility of lower rates offers the possibility of a lower monthly payment. Homebuyers struggling to afford a house will see their buying power increase.

Even amidst affordability challenges, the outlook isn’t necessarily bleak. Mortgage rates remain below the historical average. The homeownership rate also continues to rise as the labor market holds steady.

To summarize: People are still buying houses. As Sam Khater, Freddie Mac’s Chief Economist, noted recently, “Despite affordability headwinds, homebuyers have adjusted and driven new home sales to its highest level in more than a year.”

Many buyers are using strategies like rate locks and Temporary Buydowns. A rate lock secures a mortgage rate for a set time to buffer market fluctuations, while a Temporary Buydown lowers a mortgage rate for the first few years of homeownership. Low and no down payment mortgages can also help to reduce or eliminate some of the upfront costs of buying.

Are you ready to reenter the market?

Your local Academy Loan Officer can help you determine when the time is right. You may find an affordable mortgage today, or you might save more by waiting a few months to purchase. Get in touch for personalized guidance.

Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. Not all applicants will qualify. MAC724-1487688.