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The Home Front

(Above) Chair of the Federal Reserve, Jerome Powell, testifies during a United States Senate Banking, Housing, and Urban Affairs Committee hearing on March 7. Photo by Graeme Sloan (Sipa USA via AP Images).

Prolonged interest rate tightening by the Federal Reserve is like a junkyard dog on the pant legs of prospective first-time home buyers who continue to collect apartment rent receipts.

14-Mar-23 – Home loan interest rates could linger at around 6.5 percent for a few more months, according to the chief economist for National Association of Realtors. In a recently-revised forecast, Lawrence Yun said, after that, rates will dip below 6 percent – perhaps even 5.5 percent – by the end of the year.

An earlier, more optimistic forecast by Mortgage Bankers Association predicted 30-year fixed mortgage rates will decrease to 5.6 percent in the second quarter of 2023, then ease to 5.5 percent in the third quarter, and 5.2 percent by year’s end. The MBA’s 2024 forecast predicted that 30-year rates would slip to 4.7 percent by the second quarter of next year, and an affordable 4.4 percent by the third and fourth quarters.

If the Fed keeps tightening the screws, that scenario is unlikely to happen.

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Fed Chairman Jerome Powell told a Senate committee on March 7 that evidence continues to point to a robust economy and persistently high inflation.

Powell’s comments raise the possibility that the Fed will increase its key federal funds interest rate by 0.5 percent at its next meeting on March 21-22. The funds rate currently is 4.5 to 4.75 percent. The Fed previously raised its benchmark rate by a half-point in December and imposed four 0.75 percent hikes before that.

When the key short-term rate is raised, it typically leads to more expensive mortgages and higher interest charges on auto loans, credit cards, and business loans. Higher rates can cool the economy and inflation, but they also spark the risk the nation will fall into a recession.

On March 9, Freddie Mac’s Primary Mortgage Market Survey reported that benchmark 30-year fixed home loans rose to an average of 6.73 percent nationwide, up from 6.65 percent a week earlier. A year ago, the 30-year fixed loan average was 3.85 percent.

Freddie Mac

“Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy,” said Sam Khater, Freddie Mac’s chief economist.

“Overall, consumers are spending in sectors that are not interest-rate sensitive, such as travel and dining out,” noted Khater (right). “However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be buyers continue to face the compounding challenges of affordability and low inventory.”

Sam Khater

The Freddie Mac survey also reported that 15-year fixed mortgages averaged 5.95 percent, up from 5.89 percent a week earlier. A year ago, the 15-year fixed home loan average was 3.09 percent.

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

High interest rates, low inventory challenge buyers and sellers

Borrowers who shop around may find better deals. For example, on March 9, Mutual of Omaha was quoting 6.399 percent on 30-year fixed loans with a 20 percent down payment and a loan fee of $850.

John Irwin

“Higher interest rates and historically low inventory continue to be the major obstacles keeping buyers and sellers on the sidelines,” noted Realtor John Irwin (left) of Baird & Warner in his March 2023 Chicago Market Analysis. “If move-up purchasers can find a home to buy with the current low inventories, many would be trading a 3 percent existing mortgage interest rate on their current home for a 6.5 percent rate on their new home.”

Higher mortgage costs are not the only problem for first-time home buyers. “Stubbornly high and rising apartment rents are keeping consumer prices elevated,” Yun said.

For example, in January 2023, tenants renting apartments and single-family homes nationwide paid 8.6 percent more in rents this year versus 12 months ago, according to Yun.

“Moreover, the monthly change was 0.7 percent...or 8.8 percent on an annualized basis,” said Yun (right). “That was a big contributor to the overall consumer price inflation running at 6.4 percent, and well above the comfort level of 2 percent inflation.”

Lawrence Yun