By Don DeBat

28-May-23 – The “warp speed” of Star Trek’s Enterprise is the best way to describe mortgage rate hikes that have impacted the Chicago housing market over the past year.

Comparing a 14-month period in 2022-2023 to the previous 35 years, an analysis of recent Federal Reserve actions shows that interest rates have skyrocketed 4.88 percent. That’s faster than at any other time in recent history.

Over the past year, Fed chairman Jerome Powell – the economy’s Captain Kirk – has aggressively raised the federal funds rate to fight inflation. On May 3, the Fed raised its funds rate a quarter of a percentage point to a range of 5 to 5.25 percent. The effective rate is a weighted average of interest that banks charge to lend money to each other overnight.

Here is the Fed’s 35-year analysis of the most rapid federal funds rate shifts since 1988:

• Rates skyrocketed 4.88 percent in the 14-month period between March 2022 and May 2023.

• Interest charges zoomed 3.96 percent in the 24-month window between June 2004 and June 2006.

• Rates spiked 3.23 percent in the 14-month period between March 1988 and May 1989.

• Interest charges rose 2.67 percent in the 12-month window between February 1994 and February 1995.

• Rates slowly inched upward 2.03 percent in the 36-month period between December 1988 and May 1989.

The Fed’s relatively mild quarter-point rate hike on May 3, 2023, was influenced by a variety of factors based on how select indicators have shifted since the first hike in March 2022.

The following numbers show how the Fed has started to win the battle to control inflation between March 2022 and March 2023:

• The year-over-year inflation rate fell from 6.8 percent to 4.2 percent.

• Annualized Gross Domestic Product growth plummeted from 7.0 percent to 1.1 percent.

• Over-the-month change in employment declined from 414,000 new hires in March 2022 to 236,000 jobs added in March 2023.

So, the statistics show that economic growth slowed significantly over the past year, but inflation is still above the Fed’s 2 percent target.

However, analysts say “turbulence in the banking sector” caused by recent bank failures is also cause for concern, as tighter credit conditions will likely weigh on economic activity.

The only good news for prospective home buyers is the Fed may have temporarily pressed the pause button on future interest rate hikes. Recently, Powell said the Fed would “determine the extent to which additional policy firming may be appropriate.”

Earlier statements over the past year always forecasted future rate hikes.

Home loan rates at 6.57 percent

On May 25, the Freddie Mac Primary Mortgage Market Survey reported that average benchmark 30-year fixed home loans nationwide rose to 6.57 percent from 6.39 percent a week earlier. A year ago, the 30-year loan average was 5.10 percent. Fifteen-year fixed mortgages averaged 5.97 percent on May 25, up from 5.75 percent a week earlier. A year ago, the 15-year loan average was 4.31 percent.

The survey is focused on conventional, conforming, fully amortizing home-purchase loans for borrowers who place a 20 percent down payment and have excellent credit.

Borrowers who shop around may find better deals, according to RateSeeker.com. For example, on May 26, First Savings Bank of Hegewisch was quoting 5.832 percent on 30-year fixed rate home loans with a 20 percent down payment. The bank charges a loan origination fee of $615.

“The U.S. economy is showing continued resilience which, combined with debt ceiling concerns, led to higher mortgage rates this week,“ said Sam Khater (right), Freddie Mac’s Chief Economist.

“Dampened affordability remains an issue for interested home buyers, and homeowners seem unwilling to lose their low rate and put their home on the market. If this predicament continues to limit supply, it could open up an opportunity for builders to help address the country’s housing shortage,” Khater said.