Fed interest rate hike: Experts say it's not all doom and gloom

Analysts expect US housing market to take the series of rate increases in stride

Fed interest rate hike: Experts say it's not all doom and gloom

As the mortgage industry absorbs the news of the Federal Reserve’s 75-basis point interest rate hike on Wednesday, housing industry experts offered various insights on how the series of hikes will affect the mortgage market.

FOMC’s latest increase, the second three-quarter-point increase in two months, pushed the Fed funds rate to a range of 2.25% to 2.5%. It is also the biggest jump since 1994 and is expected to precede several more hikes within 2022.

Ruben Gonzalez, chief economist of Keller Williams, said: “As the Fed continues to march forward with rate increases aimed at countering inflation, the path for mortgage rates is less well-defined. Mortgage rates have historically moved closely with 10-year Treasuries; however, over the last several months, the spread between the two has widened by a full percentage point.

“There are likely several contributing factors to this widening gap. The Fed’s winding down of its balance sheet of mortgage-backed securities has likely played a role. Other contributing factors are the perceived risk generated by both rapid home price appreciation, as well as increased pre-payment risk if rates should fall in the next couple of years.”

Gonzales also pointed out the slowdown in home sales, which were down 14% in June and are predicted to continue through July.

Read more: New home sales drop to two-year low

“Home price appreciation has begun to slow, and mortgage rates are a primary factor slowing demand for home purchases. Over the next several months, the housing market will be even more in line with pre-pandemic market conditions,” he said.

Marty Green, principal at Polunsky Beitel Green, remains positive and expects the residential mortgage market to take this increase in stride.

Read next: ARMs race builds amidst rising mortgage rates

“There are no surprises here. The combination of higher home prices, increases in interest rates, inflationary pressures, and recessionary fears have created an environment too uncertain for many borrowers to move forward in buying a home,” said Green. “However, the improvement in available inventory of homes in areas that have been inventory-starved has been enough to start to attract more buyers back to the market.

“Some of our mortgage lending clients anticipated a slight improvement in mortgage interest rates in response to the Fed’s actions, particularly after the recent speculation that the Fed might raise rates in July a full percentage point. They also confirmed that the residential mortgage market has continued to cool substantially in response to the rapid increase in interest rates since the first of the year. The question is whether the slowdown is a result of most consumers simply pausing a purchase decision while they see where interest rates and home prices settle or whether they are having to delay a purchase decision indefinitely because of affordability concerns.”

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