Bracing for Double-Digit Interest Rates in 2023
By now it’s no secret that the housing markets in parts of the country are in free fall, with some metros seeing 10%+ reductions in home values from the peak just this past spring. This is all part of the Fed’s on going plan to reset the housing market, in the hopes that they can achieve their mandate of taming record high inflation.
As mortgage rates have soared in recent months as a result of the Fed’s rapid increase on rates, pressurized affordability has become the central focus for home prices, confounding those that have claimed that tight inventory and a strong labor market simply would not allow prices to fall. It seems now that such factors were simply no match for the affordability crisis created by mortgage rates over 7% for the first time in over two decades.
But if 7% rates weren’t enough to turn your stomach, there is growing talk amongst economists that the mortgage rate nightmare might just be getting started. Some have argued that even if the Fed were to stop hiking policy rates today, the average rate on 30-year mortgages could still climb to 10% or more. Given that the Fed has given every indication that, not only will the rate hikes not stop, but that two additional rate hikes will be handed down before the close of this year, the prediction for double-digit mortgage rates is gaining support from more economists by the day.
The rationale for such a prediction is simple: mortgage rates are downstream from the Effective Fed Funds Rate. That is, the Fed does not set mortgage rates. Rather, borrowers pay a premium above risk-free Treasury rates on mortgages to offset the risk a lender takes when financing a home purchase for a borrower. The 30-year Treasury rate climbed to 4.213% last Friday, its highest since 2011. The Fed has taken rates from near zero to the 3%-3.25% range this year and many are predicting a 4.75%-5% Fed Fund Rate by February 2023. Investors are projecting a more than 95% probability that the Fed will hike interest rates by three-quarters of a percentage point for the fourth straight meeting when they next convene on Nov. 1-2. Another sharp increase is expected at the Fed’s December meeting.
Because of the rapid increase in the Fed rate this year, some are cautioning that the mortgage market is only beginning to reflect these rate hikes in the mortgage rates. In other words, the 7%+ mortgage rates we’re seeing today do not yet fully factor in the enormous Fed rate hikes that have occurred, and will most likely occur again, before the end of 2022 and into 2023. The thinking goes then, that once these rate hikes are fully absorbed, mortgage rates will inevitably climb higher.
For those sitting on the fence waiting for rates to fall, doing so may become a very costly decision. After all, if rates come down in the year ahead, the option to refinance is always available. But should rates climb significantly higher than they are today, Buyers may quickly find themselves unable to afford the home they can today, even if prices do end up falling as much as some are predicting that they may.
Not all agents are the same and interviewing an agent is not something you should take lightly. Your home is one of the biggest financial transactions that you will ever make. You owe it to yourself to hire someone that will treat it that way.