How Will Rising Interest Rates Affect the Housing Market?

There is so much talk in the financial world and among people in general about the interest rate hikes in 2022. The central bank is laying its groundwork to raise interest rates this year and perhaps several times. Borrowers, as a result, will see the costs to get funding go up.

The Federal Reserve said they anticipate the first of potential multiple rate hikes to start in March as they look to dampen some soaring inflation.

So, what does all that mean to non-financial experts, and how is it likely to affect consumers and, more specifically, the housing market?

How Federal Funds Rates Affect Consumers

The federal funds rate is set by the central bank. The federal funds rate is the interest rate charged to banks to borrow and to lend money to each other overnight. This isn’t the rate a consumer pays. However, when the Federal Reserve makes a move affecting this rate, it’s also going to impact the rates for borrowing and saving money.

For a while, the central bank has been implementing what are often called easy money policies. Now, consumers are going to have to pay more to borrow. Unfortunately, the interest rates they get on their savings will be slow to catch up.

It’s unlikely to be just one rate hike, and that’s already been stated by the Fed. The last time rates went up, the Fed raised them nine times in three years.

The cumulation of rate hikes will most impact consumers on a personal level.

Borrowing Becomes More Expensive

The primary way consumers and the housing market are affected by the Fed’s signaled changes is through more expensive borrowing costs. Long-term fixed mortgage rates are going higher, influenced by both inflation and the economy.

Many analysts think the 30-year fixed-rate home mortgage will be 4% by the end of the year.

With rising rates, there are fewer opportunities to refinance, although the most qualified borrowers might be able to get a deal.

Right now, with impending rising rates, the best thing you can do before buying or considering refinancing is boosting your credit score and saving as much cash as you can.

With higher rates, housing prices might go down or at least slow down a bit. When the mortgage rates are higher, in theory, that means higher monthly payments, which can price some buyers out.

Inflation can affect this assumption, though. Mortgage rates compared to inflation are still very cheap. Additionally, rent is also soaring, so we don’t know if we’ll see the same trends we do traditionally as rates rise, at least as far as the impacts on the housing market.

How the Federal Reserve Affects Mortgage Rates

Sometimes we think the Federal Reserve directly sets mortgage rates and impacts the housing market, but that’s not the reality. Instead, they indirectly affect rates, and buyers and sellers.

The determination of mortgage rates is based on many factors like the growth or shrinkage of the economy, the inflation rate, and job creation. The monetary policy of the Federal Reserve is one factor.

The Federal Reserve is the central bank of the country, which guides the economy. The goal of the Federal Reserve is to stimulate job growth and manage inflation, which they do through monetary policy.

The Fed works to manage the cost of credit and the supply of money, with the main tool to do so being the federal funds rate. That’s the interest rate we talked about above, and the federal funds rate is what banks charge each other for short-term loans.

There are no federal mortgage rates, but the federal funds rate influences longer-term loan interest rates, including mortgages.

In some cases, the mortgage market may lead on rates, and in other cases, the Fed is leading. Usually, they’re moving in the same direction, but one doesn’t always follow the actions of the other.

Mortgage rates already go up and down daily in response to the economy in the U.S. and worldwide. The mortgage rates inherently respond to the Fed’s reactions when they meet and issue actions. There are even rare situations where the Fed’s goes in an opposite direction from mortgage rates.

What does all of this mean?

While the Fed is signaling increasing rates several times throughout the year, we don’t know how much they’ll affect home prices or borrowing just yet. Historically, this might mean costs would go down, and the market would cool, but paired with other factors like inflation, we don’t know for sure that will be true in 2022.

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