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Higher rates aren’t always a bad thing
You’ve probably heard that the Federal Reserve raised its benchmark rate this month. Scary, right? It probably means sky-high mortgage rates and an even more challenging market for homebuyers.
Or maybe it doesn’t.
According to mortgage expert Shivani Peterson, there are actually some serious benefits to the Fed increasing its federal funds rate. Peterson explained these advantages in a recent episode of The Mortgage Reports Podcast. Here are the biggest takeaways.
Listen to Shivani on The Mortgage Reports Podcast!
Mortgage rates aren’t directly tied to the Fed’s policies
The first point Peterson drove home is that mortgage rates are not directly tied to the federal funds rate. While the Fed did increase its target rate by 75 basis points (0.75%) this month, we didn’t see an equal jump in mortgage interest rates.
Instead, Peterson said, “Inflation is what drives mortgage rates. So the Fed working seriously to bring inflation down will actually have a positive impact on the rates you see available for a mortgage — whether it be a 30-year-fixed, 15-year-fixed, or 7-year ARM.”
What’s more? The Federal Reserve has been very clear about its plans for fighting inflation. As a result, the investment market — particularly the market for mortgage-backed securities, which does directly influence mortgage rates — has already reacted to the news.
As Peterson explained, “As long as the Fed stays the course on what they’ve been alluding to and hinting at in their meetings and press conferences — as long as they continue with these 50- to 75-basis-point interest rate increases — then we’ve likely already seen that news reflected in the pricing that we’re seeing available for mortgage interest rates.”
The Fed’s move is good for buyers (and the country) in the long term
The Federal Reserve increases its benchmark rate to combat inflation. As Peterson put it, “It’s really the only lever the Fed has. But, historically, it works. When they increase the cost of borrowing, we typically see inflation cool.”
Higher fed rates also usually push the country into a recession, Peterson says. If this does happen, Peterson is confident the recession would look very different from the last one America saw — at least in terms of the real estate market.
Recent Fed policy changes — and subsequent higher mortgage rates — are cutting into affordability and forcing some buyers to the sidelines. For those that remain, it means less competition and, over time, slower home price growth.
“Looking at mortgage delinquencies is a good way to predict if we’re going to see something like we saw in the Great Recession in 2008 and 2009 because in order for home values to crash, we need to see mass defaults,” Peterson said.
“A major delinquency is when a homeowner is behind three months or more on their mortgage. We saw that number actually decline from the previous month — we’re talking less than 2% of homeowners in America who are more than 90 days late on their mortgage. Foreclosures are down to two-tenths of 1%, so there are no signs of mass defaults on the horizon or home values crashing,” she explained.
Higher rates can actually help buyers who stay in the market
Recent Fed policy changes — and subsequent higher mortgage rates — are cutting into affordability and forcing some buyers to the sidelines. For those that remain, it means less competition and, over time, slower home price growth.
“Across most markets of the U.S., we’re seeing sellers have to price their properties more appropriately because the demand has cooled a little bit,” Peterson says. “We’re seeing them be willing to take contingent offers. We’re also seeing them have to work with demands from buyers on repairs. It’s not necessarily a buyer’s market yet, but definitely more so than it’s been in the past. Sellers are having to work with buyers more often.”
According to recent numbers from CoreLogic, home prices jumped nearly 21% between April 2021 and 2022. By next April, CoreLogic predicts home prices will have risen just 5.6 percent.
“Of course, that’s still a positive number,” Peterson says. “That’s not the same insane rate of appreciation that we saw before, though — 5.6% is a lot less than 20 percent.”
Even better: If the Federal Reserve is successful in reducing inflation, mortgage rates may slow by next year, too.
“A lot of analysts are predicting that interest rates come down end of this year or early 2023,” Peterson says. “There’s no crystal ball there, but it’s safe to assume that these higher interest rates are temporary.”
Your next steps
Higher interest rates can take a serious toll on home affordability. But it’s important for home buyers to remember that while mortgage rates may have risen from their record lows in 2021, they’re still below the historic average.
On top of that, rising home prices will benefit those who buy sooner as home prices should continue to appreciate across much of the country.
All in all, it’s never a bad time to buy if you’re financially ready — despite how scary the interest rate market might look. To better understand your home buying budget and loan options, talk to a mortgage lender who can show you today’s rates and help you understand what you can afford.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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