If you have been in the market to purchase a home recently, or if you work in the real estate or mortgage industries, you know that it has been a very difficult 12-15 months. Rising interest rates coupled with increasing home prices have discouraged many buyers and caused many to exit the market all together until things get a little more stable.
But, it’s not all gloom and doom. There may be some good news on the horizon as things begin to look up. Last month (February), home sales rose 14.5% compared with January, according to the National Association of Realtors. This was the first monthly increase in 12 months and the largest since July 2020, just after the COVID 19 pandemic began.
In addition, higher mortgage rates have been cooling home prices since last summer, and for the first time in a record 131 months, prices were lower on a year over year comparison. This will come as a welcome relief for potential buyers who have seen home prices skyrocket over the last couple of years.
What about interest rates? On Wednesday, March 22, we saw the Fed raise the Fed funds rate .25%. I have mentioned in this column before that when the Fed raises rates, that doesn’t necessarily mean mortgage rates are going up. When you see a Fed rate increase, that is referring to the Federal funds rate. The federal funds rate is the target interest rate set by the Fed at which commercial banks borrow and lend their extra reserves to one other overnight. In other words, if you see a Fed increase of .25%, that does not mean that mortgage rates automatically go up by .25%.
So why does the Fed change the Fed funds rate and what impact does this have on mortgage rates? In short, the Fed raises the Fed funds rate in an effort to curb inflation. We all have felt the impact of climbing inflation over the last couple of years. One of the ways to get that under control is to raise this key interest rate.
Since there is a direct correlation between inflation and mortgage rates, any time we see inflation rise, mortgage rates will also rise, and vice versa. As inflation has climbed specifically over the last year and a half, mortgage rates have also climbed.
So how did the most recent rate hike actually help mortgage rates? Well, this rate hike by the Fed was only .25%, which is down from their recent .5% hikes. This is indication that while inflation is not yet under control, we seem to be getting there. As we see inflation slow and hopefully begin to decline, we will also see mortgage rates do the same.
I realize that is a lot of information thrown at you, so what does it all mean in summary? It appears that home prices are coming down some from the (massive) increases we’ve seen recently. In addition, we “hope” (and many economic factors would indicate) that we are getting a handle on recent increases in inflation, so mortgage rates should begin to come back down. While we don’t expect them to drop back to record lows of 2020 and 2021 anytime soon, they should definitely get back to a much more appealing level. These factors coupled together should make for a great spring and summer in the real estate market. If you have questions about whether now is a good time for you to buy, contact a local realtor and mortgage professional!