An increase in housing supply will likely significantly slow home price growth.
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The Federal Reserve intensified its fight to cool inflation by launching the largest interest rate increase since 1994 and indicated it would do whatever it could to tame price hikes and bring down the cost of gas and food.
The central bank of the United States agreed to a 0.75-percentage-point rate expansion at its two-day policy meeting that concluded Wednesday and anticipates that ongoing increases in the target range will be appropriate. Short-term borrowing costs are now in a target range between 1.50% and 1.75%.
The Fed issued a statement Wednesday pointing out the invasion of Ukraine by Russia is causing tremendous human and economic hardship and that the Federal Open Market Committee is highly attentive to inflation risks.
Federal Reserve Chairman Jerome Powell said at a news conference that the war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. “In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions,” he explained.
The average 30-year, fixed-rate mortgage rate spiked by 55 basis points from 5.23% to 5.78% for the week ending Thursday, June 16, 2022, according to the latest figures released by Freddie Mac.
To put that figure into perspective, Jacob Channel, LendingTree’s senior economist, said a $300,000, 30-year, fixed-rate mortgage with a rate of 5.23% would normally cost a borrower about $1,653 a month, excluding other costs like taxes and insurance. “That same loan would cost a borrower $1,756 at today’s new average rate of 5.78%,” he said. “That’s an extra $103 a month, $1,236 a year and $37,080 over the lifetime of a loan.”
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Channel said it’s possible that the rate increase could be somewhat of an over correction on the part of lenders, and as a result, it may fall somewhat over the coming weeks as lenders adjust to the current high-inflation environment.
“With that said, mortgage rates have already risen considerably higher and faster than what most predicted they would at the start of the year – and, as evidenced by today’s latest figures, lenders have shown willingness to continue to raise rates even as home buyer demand falls,” he said. “Therefore, while we may see some ebbing and flowing of rates over the coming weeks and months, it’s possible that rates will still end up higher than they are today by year’s end.”
But Channel said rising rates aren’t all bad news. “Less demand for housing could help to alleviate some of the housing supply crunches that are being felt across the country,” he explained. “Though it’s unlikely that home prices will majorly slump, an increase in housing supply will likely significantly slow home price growth and give would-be buyers more housing options to choose from.”
Census data on new residential construction showed housing starts fell 14.4% from April, and are down 3.5% from May 2021, to 1.55 million.
Zillow economic analyst Dan Handy said that in a very competitive housing market this spring, builders continued to keep their pace of housing starts above levels not seen in the decade prior to 2020.
“Though in the face of quickly rising interest rates, and a related cooling of buyer demand, some builders may be beginning to pull back their plans with declines in permits for the second month in a row, and a much steeper drop than the consensus,” he said. “Builders are expressing pessimism about the state of the housing market, marking their lowest levels of confidence in future sales since the start of the pandemic.”
Holden Lewis, home and mortgage expert at personal finance platform NerdWallet, said the 30-year fixed-rate mortgage surged past 6% in the last week, its highest level since November 2008, when the economy was crawling out of the financial crisis.
“The May inflation report provided the final shove that pushed mortgage rates past 6%,” he said. “The annual inflation rate unexpectedly accelerated to 8.6% in May, and mortgage rates won’t have much reason to fall as long as inflation remains elevated.”
Lewis said the Federal Reserve increased short-term rates by a hefty 0.75% Tuesday to slow economic growth and get inflation under control.
“Mortgage rates tend to go up and down in anticipation of Fed rate moves, which is a way of saying that the Fed increase was already baked into mortgage rates,” he said. “In other words, mortgage rates are more likely to go up or down before Fed meetings than after Fed meetings. Over the next week or two, we probably won’t see big movements in mortgage rates like we did last week.”
“Home sales are slowing dramatically because of skyrocketing mortgage rates,” added Lewis. “The decreased demand means we’ll soon see a slowdown in home price increases. This is evidence that the Fed’s monetary policy is working. Housing costs are a major factor in the Consumer Price Index, and a slowdown in home prices will eventually show up in the inflation report.”
But David Dworkin, president and CEO of the National Housing Conference, said higher mortgage rates are not a sustainable way to reduce shelter costs.
“Today’s decision by the Federal Reserve to increase the discount rate by 75 basis points will significantly increase the cost of homeownership for millions of Americans,” he said. “The Fed has no choice but to raise rates to address inflation. Higher mortgage rates are a necessary but bitter pill. However, without measures to address housing shortages, higher interest rates will only hurt low- and moderate-income families without having a material impact on home price inflation.”
“Higher rates will do nothing to address the key driver of inflation in the housing sector: the persistent, long-term shortage of housing supply,” added Dworkin. “As Chairman Powell noted in his comments, while the number of unfinished homes is high, the inventory of finished homes is still incredibly low, historically low.”