Mortgage Rate Outlook Uncertain As Fed Hikes Key Rate Again
What happened: Today the Federal Reserve raised the federal funds rate by a quarter of a point in an ongoing effort to curb inflation while acknowledging increased uncertainty caused by turmoil in the banking sector.
The central bank stated that recent developments in the banking sector are “likely to result in tighter lending conditions and weigh on economic activity.” Future policy decisions will likely depend on the significance and duration of these tighter conditions.
Senior Economist Orphe Divounguy’s thoughts on the impact to mortgage rates and housing:
Bond yields – and the mortgage rates that tend to follow them – fell in the immediate reaction to the Fed’s statement, which signaled that the central bank’s program of rate hikes is likely nearing its end to balance new financial risks. But the relationship between mortgage rates and Treasuries has weakened slightly in recent weeks as the secondary mortgage market reacts to speculation that more financial entities may need to sell their long-term investments, like mortgage backed securities, to get more liquidity today. The path forward for rates will largely depend not just on the path of the 10-year and economic uncertainty in general, but also on the extra uncertainty specific to the secondary mortgage market.
Tighter credit conditions will likely limit any dramatic, near-term downward movement of mortgage rates even as Treasuries decline. This could restrict mortgage lenders’ access to funding sources, resulting in higher rates than Treasuries would otherwise indicate. For borrowers, lending standards were already quite strict, and tighter conditions may make it more difficult for some home shoppers to secure funding. In turn, for home sellers, the time it takes to sell could increase.
However, in the medium-run, expectations for slower economic growth and lower inflation should help mortgage rates decline. This would benefit home shoppers through better affordability and sellers by reducing the intensity of interest-rate-lock in. That could help free up a tight market, though would coincide along with a period of increased risk of job losses.
Mortgage rates are steering both supply and demand in today’s costly environment. Home sales picked up in January when rates were relatively low, then slacked off as they ramped back up. Lower rates could also convince more homeowners to list, adding badly-needed inventory to an extremely limited pool.
Of course, much uncertainty surrounding the state of inflation and this still-evolving banking turmoil remains. In his press conference, Fed Chair Jerome Powell stated that estimates of how much the recent banking developments could slow the economy amounted to “guesswork, almost, at this point.” Evidence – in either direction – of spillovers into the broader economy or accelerating inflation would likely cause another policy shift, which would materialize in mortgage rates.
