On Wednesday, the Federal Reserve increased its target federal funds rate by 0.50 percent to combat 40 years of record-high inflation. This will hopefully slow down demand for products and services by increasing the cost of borrowing money. The Fed’s aim is to reduce inflation without restricting economic growth.
Homebuyers shopping for a new house or refinancing an existing property will not be immediately impacted by the rate increase. While the change in interest rates will have an immediate and indirect impact on the cost of all sorts of loans, mortgages are primarily affected by the yield on 10-year Treasury bonds. The yield on the 10-year Treasury recently hit 3% for the first time since late 2018, anticipating the Fed’s decision to raise rates.
Fed reducing holdings of mortgage-backed securities
The Federal Reserve announced that it will begin to decrease its holdings of mortgage-backed securities (MBS) on June 1, in addition to increasing interest rates. The purchase and sale of these securities is another instrument by which the Fed that influences mortgage rates.
The Fed is set to shrink its $9 trillion asset portfolio starting in January, which will result in more supply and push mortgage rates higher. On the other hand, when the Fed announced that it would buy unlimited quantities of MBS and Treasury securities during the epidemic, this boosted demand, pushing mortgage rates to all-time lows.
Since the start of the year, the 30-year fixed-rate mortgage has increased roughly 2 percentage points, reaching 5.10%, which is the highest since April 2010. With the Fed set to reduce its MBS holdings, borrowers should anticipate continued increases in mortgage and refinancing rates.
Mortgage applications at lowest level since 2018
Purchasing a home is more expensive than it has been in the previous 55 years, with mortgage rates and house prices reaching an all-time high of $375,000 in March. This has begun to have an impact on demand for prospective home buyers. Mortgage applications are at their lowest level since 2018 according to the Mortgage Bankers Association.
“Mortgages are now costing more money for home buyers than they were just a few months ago,” NAR Chief Economist Lawrence Yun added. “This may cost a family of four an additional $300 to $400 per month, which is a significant burden for a working household.”
Today’s consumers are more concerned with financial constraints than they have been in the recent past. Higher wages have occurred over the previous year, but owing to inflation, these gains were offset. Home sales and value appreciation will be slowed by higher mortgage rates, which are still at a historic low.