September 29, 2022 – With rising interest rates and runaway inflation underway, the horizon is extremely cloudy for Chicago home buyers and apartment renters.

On September 22, the Federal Reserve aggressively raised its key funds rate by a hefty 0.75 percent for the third consecutive time and signaled that more large interest hikes are coming before the end of 2022.

In an effort to cool inflation to a targeted 2 percent from the current 8.3 percent, the Fed boosted its benchmark short term funds rate to a range of 3 to 3.25 percent – the highest level since early 2008.

The move immediately pushed benchmark 30-year fixed mortgage rates to an average of 6.29 percent nationwide from 6.2 percent a week earlier, reported Freddie Mac’s Primary Mortgage Market Survey. A year ago, 30-year fixed loans averaged only 2.88 percent.

“The housing market continues to face headwinds as mortgage rates increased again,” said Sam Khater, Freddie Mac’s chief economist.

This new hike pushed the 10-year Treasury rate – the gauge economists use to forecast 30-year fixed mortgage interest charges – to 3.71 percent, its highest level since 2011. Forecasters predict that the Fed will boost its benchmark funds rate to 4.4 percent by year’s end, and up to 4.6 percent in 2023. That would be the highest level since 2007. Based on these moves by the Fed, mortgage analysts say 30-year fixed home loans easily could reach or surpass the 7 percent level by the end of 2022.

By earlier interest rate standards, that still could be considered affordable. In 1994, when this writer launched The Home Front column in the Pioneer Press newspapers, benchmark 30-year fixed mortgage rates averaged 8.75 percent and were inching toward 9 percent.

Twenty-eight years ago, home buyers needed an income of $46,200 to qualify for a $100,000 home loan on a typical $125,000 house with a monthly payment of $1,078.

Today, a borrower who places a 20 percent down payment and takes out a 30-year fixed rate loan of $300,000 at 6 percent interest this week would make a monthly principal and interest payment of about $1,800.

“Impacted by higher rates, house prices are softening, and home sales have decreased,” said Khater (right). “But despite this decrease in sales, the number of homes for sale remains well below normal levels.”

Fifteen-year fixed-rate mortgages rose to an average of 5.44 percent nationwide on September 22 from 5.21 percent a week earlier, Freddie Mac reported. A year ago, the 15-year fixed loan averaged only 2.15 percent.

The Freddie Mac survey is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20 percent down and have a FICO score of 740. Borrowers with lower credit scores will pay a higher interest rate.

Landlords feel the pinch

Apartment owners also are feeling the pinch of creeping inflation and soaring real estate taxes. And, those forces are causing rents to rise.

“What this means for real estate investors is that debt is becoming very expensive very quickly,” said Veena Jetti (left), founder of Vive Funds, a national real estate investment firm. “To keep asset values high, rental prices are continuing to steadily increase in our core markets.”

In Chicago, annual rent increases currently average 4.5 percent in North Side walk-up buildings. However, pandemic “catch up hikes” of up to 20 percent have occurred in posh downtown high-rises, experts say.