The Battle of Mortgage Rates Against the Fed, Supply, and Inflation

• Author: Monica Jackson
• Posted: 2024-08-03

The Battle of Mortgage Rates Against the Fed, Supply, and Inflation

What Is the Mysterious Fed Rate?

The fed rate is a popular term amongst financial gurus and news sources. However, what exactly is this mysterious fed rate? The fed rate is set by The Federal Reserve, the central bank of the United States. More importantly, the fed rate or federal funds rate is the interest rate at which banks lend or borrow their reserve funds. The rate can change as frequently as eight times a year or as infrequently as no change at all during a financial year.

With that being said, the fed rate does not have to directly impact mortgage rates, yet a change in the fed rate often leads to a correlating change in mortgage rates. Mortgage rates are most directly impacted by the 10-year U.S. Treasury yield, which also feels effects from changes to the fed rate. It is for this reason, that there is typically quite a bit of chatter in the mortgage world when the Federal Reserve adjusts the fed rate, for better or for worse.

Forecasted Adjustments to the Fed Rate

It is no secret that Americans today are feeling the pressures of inflation. From rising gas prices and grocery costs, inflation is a very real scenario to the everyday consumer. In December of 2021 alone, inflation hit a 40-year high for the United States. In order to combat this raging problem of inflation, the Fed is expected to raise the fed rate three times in 2022 in conjunction with other monetary policy changes. The first hike is expected to occur in March of 2022, changing the fed rate from the current .25%. By the end of 2022, the fed rate could be as high as 0.75% to 1.00%.

However, many economists predict that the changes will not end in 2022. Most economists seem to believe that the fed will once again raise the fed rate up to three more times in 2023. These changes will affect nearly every aspect of personal lending from car loans, credit card rates, and subsequently mortgage rates.

Mortgage Rates Continue to Rise

Today's mortgage rates are quickly reaching and even surpassing pre-pandemic levels. To date, the 30-year fixed-rate mortgage is averaging around 3.56%, a new high since early 2020. 15-year fixed-rate mortgages have also seen increases. Today's averaged 15-year rate floats around 2.79% , making it significantly higher than last year's average of 2.21%.

Overall, mortgage rates have rose for three consecutive weeks in 2022, a trend not expected to slow down anytime soon. Some economists do not have very high hopes for consumers to enjoy once historically low mortgage rates in 2022. In fact, some sources believe that the average 30-year fixed-rate mortgage could reach 5% this year alone.

The Housing Market Remains Competitive Despite Rising Rates

Despite recent unfavorable changes in mortgage rates, the housing market remains rather competitive. Realtors and homebuyers alike feel the strains of historically low supply. This shortage in supply is keeping the housing market competitive, despite fluctuations in 30-year fixed mortgage rates. In addition to surviving higher mortgage rates, many prospective home buyers could be facing a modest increase in home prices in 2022 as well. This is yet another trend that could very well carry over into 2023.

1% a Small Number Making a Big Difference

Although some percentages such as 0.5% or 1% appear small at first glance, these small percentages can lead to big savings in mortgage rates. For example, a 1% increase in a $200,000 30-year home loan (without additional payments) could lead to over $35,000 in additional interest charges over the life of the loan. So while 1% may not make a huge difference in monthly payments or sound like a large sum, it certainly adds up to quite a bit of savings (or costs) over the course of 30 years.

There is Still Hope for Homeowners

The news of inflation, monetary policy changes, rising rates, and a competitive market can feel overwhelming to many homeowners and home buyers. However, there is still plenty of time to take advantage of mortgage rates that are still relatively low compared to how high they can rise. Given today's financial environment it is worth consulting with a reputable bank or lender about refinancing your current residence or locking in a rate when purchasing a new home. Doing so could result in reducing monthly mortgage payments or saving thousands of dollars over the life of a mortgage.