Fed rate increase reaction – higher borrowing costs coming?

Industry reacts to Fed's 0.75% increase

Fed rate increase reaction – higher borrowing costs coming?

The mortgage industry has reacted to the Federal Reserve’s decision this week to hike rates by three-quarters of a percentage point – the highest increase since 2007.

It’s the third rise in a row and the latest attempt by Federal Reserve chair Jerome Powell to tame spiraling inflation, which currently stands at 8.3%.

The hike, lifting the central bank’s benchmark overnight interest rate to between 3.00% and 3.25%, will increase borrowing costs for millions of people, although even before Wednesday’s announcement, mortgage rates for 30-year fixes had already shot past the 6% barrier.

Powell singled out the housing market for comment, saying it was probably in need of “correction” following record house price increases, which he described as “unsustainable”.

In response to the rate hike, Mike Fratantoni, the chief economist at the Mortgage Bankers Association (MBA), said: “At 3%, the rate is now above what most FOMC (Federal Open Market Committee) members consider to be the long-term level and should be effective in reducing demand and slowing inflation over time.

“Rate volatility is high due to both uncertainty regarding the Fed’s next moves and the lack of a steady, consistent buyer for Treasuries, and particularly mortgage-backed securities. 

“The FOMC members’ projections indicate slower growth, slowly decelerating inflation, and a fed funds rate that will likely top out well above 4%. The surprise for the market might be the median expectation that they could increase rates to 4.4% by the end of this year.

“Mortgage rates have jumped the past few weeks following the August inflation report, which indicated that the Fed will continue to be aggressive in combating stubbornly-high inflation levels.”

Michele Raneri, vice president of US research and consulting at TransUnion, said the greatest impact to borrowers of continued rate hikes would be seen in the mortgage market.

She said: “When interest rates rise, consumers who may otherwise be considering buying a home may instead choose to hold off in hopes that interest rates decline in the not-so-distant future. And in that environment, those who do choose to buy may be more likely to select an adjustable-rate mortgage because their initial monthly payments will be lower than those they would find with a fixed rate mortgage.”

She also gave a sobering example of what homebuyers with good credit could expect to face today compared to the start of the year.

“Right now, the average monthly payment for a $300,000, 30-year fixed rate mortgage at the current 6.0% rate is approximately $1,800. This compares to a roughly $1,300 monthly payment at the 3.2% rate seen in January – about $500 a month higher,” she said.

In response, she urged borrowers to carefully manage their finances. “If consumers haven’t already evaluated their budget after feeling the impact of inflation, they should be starting it now,” she said. “Have an emergency fund at the ready. Three to six months of expenses ideally, but even a few hundred extra dollars can prove valuable if unforeseen circumstances arise.”

She also warned consumers to only use credit to the extent “they are confident they can afford to make those payments and avoid delinquency”.

The rate increase is also likely to result in higher unemployment and a slowdown in economic growth, casting doubts that there will be a soft landing for the US economy.

Although not involved in the mortgage industry, Angela McArdle, chair of the Libertarian National Committee, which manages the affairs of the laissez-faire Libertarian Party, gave a damning assessment of the Fed’s decision, accusing the economic institution of failing to understand the causes of inflation or how to stop it.

She said: “Inflation is not some uncontrollable phenomenon like the weather; it’s a policy deliberately chosen by central planners and their cohorts in Washington, D.C.

“The impending Fed-induced recession that threatens the American people is caused by our government’s addiction to endless money printing. From the soaring prices at the gas pump and grocery store, to less families being able to pay their mortgages, to incoming spikes in joblessness and, perhaps worst of all, homelessness - you can trace it directly back to our government’s financial policies."

NerdWallet’s home and mortgage expert, Holden Lewis, warned that mortgage rates “have plenty of room to go up even more” but welcomed the move as a means to reduce inflation and control home price growth.

He said: “The Federal Reserve has succeeded in reducing inflation in home prices, by sending mortgage rates skyward. The median existing home price rose 7.7% in the 12 months ending in August. That’s the slowest year-over-year increase since June 2020. Price growth has slowed because the Fed has pushed mortgage rates about three percentage points higher this year.”

Speaking weeks before the Fed’s decision, Dean Rathbun, senior vice president at United American Mortgage, sounded a cautionary note about what he thought would happen if mortgage rates went beyond 6%. 

“If you get a six handle on those rates, it’s going to change the sentiment of the consumer for sure,” he said.