Homebuyers Will Still Pay High Borrowing Costs Despite Fed Action

Despite the Federal Reserve’s announcement this week that it could finally halt its year-long campaign of rate increases, prospective homeowners should prepare for excruciatingly high mortgage rates.

On Wednesday, the Fed increased the short-term rate to approximately 5.1%, the highest since 2007.

After a run of 10 rises dating back to March 2022, the Fed effectively opened the idea of suspending the raises while it refrained from pronouncing an end to them.

Mortgage rates will probably only slightly decrease during a pause, according to Greg McBride, chief financial analyst at Bankrate.com.

According to McBride, any significant and long-lasting decrease in mortgage rates “will require further easing of inflation pressures and continued slowing of the economy.”

Inflation has decreased from a peak of 9.1% in June of last year, but despite signals that the economy is slowing, it is still significantly higher than the Fed’s target rate of 2%.

The country’s GDP increased by just 1.1% annually in the January-March quarter, a decrease from the 2.6% rise in the prior quarter.

For the second consecutive month, consumer spending, which makes up 70% of all economic activity in the United States, remained flat in March.

More weaknesses might assist in lowering mortgage rates, but the opposite is true.

According to Lisa Sturtevant, chief economist at Bright MLS, “the economy is still uncertain.” “There’s a chance that mortgage rates will decline, but I anticipate that we’ll still be in the 6% (range)”

The yield on 10-year Treasury bonds, which lenders use as a benchmark for pricing mortgages, is affected by changes in the Fed’s benchmark lending rate but not directly by changes in mortgage rates.

That’s because falling bond prices lead to rising bond yields when interest rates rise.

Future inflation predictions among investors, as well as global demand for U.S. Mortgage rates, are also impacted by Treasurys.

After several months of Fed rate hikes and persistently strong inflation, the average rate on a 30-year mortgage hit a two-decade high of 7.08% last October.

According to mortgage buyer Freddie Mac, it decreased marginally from last week’s average to this week’s average of 6.39%. It was 5.27% on average a year ago.

A 22% reduction in home sales over the last year ended in March is attributable primarily to higher borrowing costs and a lack of available properties. This marks eight consecutive months of annual sales declines of 20% or more.