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The U.S. economy has been hounded by inflation for months and geopolitical events are compounding the issue further — threatening to increase the cost of everything from home loans to hotdogs.
In April, inflation stayed above 8% and the Federal Reserve has tackled inflation by increasing short-term interest rates, which has helped to push mortgage interest rates higher. With the war in Ukraine and China’s COVID-19 lockdowns adding to inflationary pressures, the Fed is expected to continue raising rates.
Early on at the start of the year we saw some indications that supply chain problems were starting to be alleviated, says Lindsey Piegza, chief economist at the investment firm Stifel Financial. Instead, Russia’s invasion of Ukraine and the latest lockdown hitting China are poised to add pressure to inflation that was already running high.
“Reports suggest that supply chain disruptions are almost as bad as they were during the lockdowns of 2020,” Piegza says. “But it’s going to take months for those disruptions to seep fully into the supply chain. The pain of the April and March lockdown is not yet fully being felt in the manufacturing sector outside of China.”
With so many variables potentially impacting the economy, here’s where three experts believe mortgage rates are headed based on the current conditions in the global economy.
How Three Experts Think the Ukraine War and China’s Lockdowns Will Affect Mortgage Rates
Dr. Lindsey Piegza, chief economist at Stifel Financial
These events have exacerbated the current inflationary environment, adding increased “pressure on the Fed to take more aggressive action to raise rates faster and potentially higher than they otherwise would have.” This will lead to rising interest rates for all types of borrowing. “It’s going to impact every individual and every American household.”
Ken H. Johnson, real estate economist at Florida Atlantic University
Both of these events can negatively impact the supply chain and add a degree of uncertainty to the global economy. The longer these issues persist the greater the threat to the global economy. In this scenario, investors are likely to seek higher rates of return on their investments. This means investments tied to mortgage loans would need to adjust to attract buyers which, “in turn will tend to drive mortgage rates up.”
Odeta Kushi, deputy chief economist at First American Financial Corporation
An economic downturn could cause rates to fall. However, further supply chain disruptions could add to inflation, which puts upward pressure on mortgage rates. “Mortgage rates may bounce around week-to-week as these forces push and pull, but the expectation is that mortgage rates will inch upwards in the months to come as the Fed takes aggressive action to tame inflation.”
How Homebuyers Can Deal With the Economic Uncertainty
Even when faced with rising interest rates, it may still be the right time in your life to become a homeowner. What’s most important is to focus on the fundamentals of homebuying: Buy what you can afford and have a long-term timeframe for owning the home. This way you’re better positioned to weather the ups and downs of your local housing market.
Focus on Your Budget
A useful budget for a home purchase and day-to-day expenses can help you align your financial decisions with your goals and priorities.
As you consider what housing situation is best for you and your family, build in flexibility to deal with uncertainty. As a rule of thumb, experts recommend spending no more than 28% of your pretax income on housing.
“I think individuals and households need to be asking themselves, can they withstand a sizable shock to their income?,” Piegza says. “Do they have enough savings to carry them for at least one month, two months?”
Carefully Consider If It’s the Right Time and Place to Buy a Home
With both interest rates and home prices rising, it is quickly becoming much more expensive to purchase and own a home.
“It’s pretty clear. We’re at the peak of the current housing cycle,” Johnson says. And some experts believe the outcome of this housing market will be different than it was during the Great Recession. In the coming years, housing markets could look very different from one city to the next. “All areas have [housing] inventory shortages right now, but some areas of the country are getting population influx, and others are losing population or have minimal gain expected,” he says.
In real estate markets that are gaining population, “those parts of the country are going to see a prolonged period of unaffordable housing,” Johnson believes. And in cities with a declining population, we could see a downturn in the housing market.
Depending on your situation and your timeframe for owning a home, renting could make sense. I think renting is wise, even in the face of rising rents because it’s a shorter time commitment and you can reinvest what you would have spent on homeownership, Johnson says. The money you would have spent purchasing and maintaining a home could go into an emergency fund, add to down payment savings, or give a boost to your retirement account.
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