Housing Market Shows More Dangerous Signs Of Instability
(LibertySociety.com) – Mortgage demand is down as rates rise, but it doesn’t necessarily mean disaster in the housing market is on the horizon. In fact, housing prices are still rising, which is good news for owners, but bad news for potential buyers. The federal government is working to combat inflation numbers, and thereby consumer products, by raising interest rates and slowing down the economy. Unfortunately for potential homebuyers, it means mortgage rates are increasing. What may have been affordable just one year ago may now be out of reach.
The Fed Funds Rate
Inflation has been at historic highs in the United States for the entirety of 2022 so far, hitting 9.1% in June. On September 8, Federal Reserve Chair Jerome Powell said his commitment to “fighting inflation” will result in raising the fed funds rate for the fifth time this year. The experts worry if he lets up too soon, it will worsen the economy in the long run. The federal rate now sits between 2.25% and 2.50%, driving all other peripheral interest rates up — including mortgage rates.
The rate Powell is raising represents the interest rate banks charge one another to borrow money. As the number increases, the higher cost trickles down to the consumer, who then must pay more to borrow money from the institution. So, while the fed funds rate isn’t the rate at which consumers borrow, it drives those charged to the general public, businesses, and any other entity looking for a loan.
Impact on Housing Now and Tomorrow
Mortgage rates have been climbing fairly steadily since January when they were a little over 3%. As of August 24, 30-year mortgage rates are now over 5.5%, which means they’ve nearly doubled in less than 8 months. While many people were purchasing homes and refinancing existing mortgages at the beginning of 2022, the applications are dropping off as home loans become more expensive. CNBC reported that the number of people applying for new mortgages is down 23% from this time last year, with refinancing applications down 83%. Simply put, because it now costs more to own a home, fewer people are buying, which will eventually cool prices.
Before homeowners panic, however, aggressive appreciation throughout the pandemic means many owners are sitting on a lot of equity. That means the housing market would likely have to decline sharply before negatively affecting values.
Mortgage Bankers Association Senior Vice President Mike Fratantoni points to the strong job market as a means to “support housing demand.” He said high employment will probably lead to a step up in home purchases, despite the short-term lull.
What do you think will happen with the housing market as rates continue to rise? Do you feel a crash is on the horizon?
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