The Feds Interest Rate Decision
Wednesday March 16, Jerome Powell and the Federal Reserve announced their interest rate increase of 0.25%. After months of speculation and shifting opinions on where they would finally lay their decision, we now know what we’re facing in the immediate timeframe and can begin making some assumptions regarding the medium and long term timeframes as well. Today we will unpack what they said, what we think it means, and how this impacts mortgage rates.
The primary decision was to raise the Fed Funds rate by 0.25% bringing the Fed Funds rate to a range of 0.25 – 0.50%. There will also be subsequent 0.25% interest rate increases throughout the remainder of 2022. There will also likely be several rate hikes into 2023 as well as the Fed desperately fights to wrangle run away inflation. The attempt is to cool down demand and normalize monetary policy, but is it too little too late? As it is, their participation in the financial markets over the last 2 years generated more than $9 Trillion in asset holdings that they will have to begin removing themselves from holding. This is the “tapering” you’ve heard them talk about for months. This tapering is the Fed unwinding themselves from direct participation in the treasury and bond markets (to the tune of $120 Billion a month). This participation was a key component of allowing our economy to have the stability (for better or worse) we experienced during the uncertainty of the pandemic and global lockdowns. While in hindsight we can assume there may have been better solutions capable of getting us through that time, in the middle of the chaos, the Fed made the decision they felt was best. Now they must face the consequences, and therefore we must as well.
The Short Term: The next 6 months
Short term interest rates for things like personal lines of credit, credit cards, car loans will increase, and continue to increase for the next 6 months and beyond. This will put price pressure on goods and services as affordability runs head on into costs to borrow money. The goal is for prices to flatten and eventually ease which should cool off producer and consumer inflation that has skyrocketed over the past year. Too much money chasing too few goods ramped up prices and we’re likely to see a consumer spending pullback very rapidly outside of core necessities. If you have major purchases to make like appliances, furniture, or even a car, you may be better off paying cash for those items vs. financing them during a time of increasing borrowing costs.
Medium Term: 6-12 months
Like a massive container ship off in the ocean, it will take time for these monetary policies to effect change and make their way into the lives of consumers. Forward looking, we already know that goods and services have been ramping up well before the Fed’s decision. It is realistic to expect we see more permanency of these elevated costs through 2022 and into 2023 even if it’s only as a factor of time taking hold and work the effects of the decision into the outcomes we hope to see. Price of goods should begin to flatten or maybe even come down a bit near the end of 2022 and beginning of 2023. We expect consumer spending behavior to put pressure on everything eventually, but it will take time for that to begin happening. Supply chain shortages have kept prices high, but as supply continues to show up, and consumers are more selective with how and when they spend their money, we are likely to see prices normalize closer to the 12-month mark from where we are at now. Just a quick look at used car prices being 40% up right now is a prime example of an industry sector in need of a cool off and return to the atmosphere where prices are more inline with what normal inflation prices should be. As people evaluate their commute, leisure gas spending and summer road trips you may see an increase of used car supply (especially among lower MPG vehicles), and that increased supply matched with fuel prices should force a price correction.
Long Term:” 12 months +
This timeframe presents a much more challenging landscape to wrestle down. The fact that the Fed has announced all their subsequent rate increases is a projection that they know we are way of course compared to where they want the economy to be. It’s an admission that there is a lot more pain to come, by design and necessity, to try and get the economy back on track to a more normal rate of inflation and monetary policy. The main threat to the 12+months’ time horizon is all the things that can happen between now and then. Unanswered questions will weigh in heavily on the outcome we will experience 12 months from now. Russia Ukraine unrest, Oil prices, supply chain woes, food production, “the great resignation”, are just a few headline worthy topics that apply tremendous pressure on any attempt to tamp down inflation and course correct the American economy. The early days of calling inflation “transitory” are long gone and it’s best for consumers to expect a long road back to “normal”.
What the Federal Reserve’s decision means for Mortgage Rates:
Although the Federal Reserves decision does not bear direct impact on mortgage rates, their sentiment about monetary policy, inflation, short-term borrowing rates, does project they are concerned about where we are at, and the degree to which we need changes in order to get to where they want to be. Although they have tried to separate themselves from the talking point that 2% inflation is their target, remember THAT is their ultimate target. We are so far beyond that right now, that all the changes they are proposing, along with likely many years of letting change take effect, are what it’s going to take to get us anywhere close to that target rate. Mathematically speaking, we will have to experience a healthy duration of time below that inflation target to even have an average of 2% inflation over any measured period of time. This is unlikely to happen, and the housing market will not be immune to the challenges facing us ahead.
Expect mortgage rates to elevate and stay higher than the lows of 2020 and 2021. Those rates are long gone. Despite being unable to rationalize an increasing rate environment and home prices at the same time, we’re legitimately a bit stuck at the moment as BOTH are upon us. Household affordability continues to create immense pressure right now with home prices at all-time highs. Initially, this was part function of mortgage money being the cheapest it had historically ever been. That tide has shifted, and now we are facing the lowest inventory levels we have experienced as the catalyst keeping prices at their current highs. The challenging market will impact aspiring buyers directly and most dramatically. Borrowers who may have been able to afford the current local house prices 6 months ago at the mortgage rate from 6 months ago are finding themselves priced out of the market simply as a function of interest rates changing upwards. When a 1% increase in mortgage rate equates to $500 – $750 a month of increase cost, we cannot overlook the weight of that impact on prospective buyers. Some are being sidelined because of this and there is no indication that this will change in the near term.
For buyers who are still in the game, when completing your qualification for a mortgage, project your interest rate to be 0.25 – 0.5% higher than the current market rate today. This is not because it WILL become that, but even a 3-6 month home search process can leave you drifting in the interest rate waters as a bystander to what’s happening in the financial markets even before you land a purchase offer. To best prepared, get yourself approved at today’s rate, but qualified on what your monthly payment will be with an interest rate 0.25% – 0.50-% higher than today’s rate, just in case. This will secure your ability to confidently make offers on homes in a changing interest rate environment while still staying within your affordability.
Current homeowners, do not roll the dice hoping for lower rates ahead. There may be small windows during any given week where rates dip for a trading session, a day, or even a few days, but the overall direction of interest rates is not going downwards right now. Simply put, don’t try to catch the wind. If you are sitting at all time highs of home equity and you’ve been eager to take on that home remodel, kitchen upgrade, yard refresh, or even build an ADU or granny flat…NOW IS THE TIME! While your home has gained in value there should be more than enough equity to take cash out to tackle your most desired project. If you have no plans on moving in the near future, then invest in the long-term viability of your home and it’s future value by taking on the work today. Afterall, in this market environment, it’s essentially the house paying for its own updates. Waiting even a week could cost hundreds of dollars a month more than by starting your cash out refinance process today. There is no monetary argument to be had for waiting to pay more for your cash out in 3 months, when all factors point to higher rates ahead.
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Rates & Fees Disclosure:
‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.
‡ Based on Mortgage Heroes internal data.
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