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Understanding The Federal Reserve Rate Hikes

The Federal Reserve raised the federal funds rate by 0.75 percentage point for the fourth time in early November, marking an unprecedented pace of rate hikes.

The benchmark short-term borrowing rate has been raised six times this year in an effort to cool down inflation, which is still near 40-year highs and causing most consumers to feel increasingly cash strapped.

The Fed noted in a policy statement that the “cumulative” impact of its hikes are being considered relative to determining future rate increases. Economists are hoping this
signals plans to “step-down” the pace of increases going forward, which could mean a half point hike at the December 13-14 meeting and then a few smaller increases in 2023.

What The Federal Funds Rate Means To You
The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers
pay, the Fed’s decisions affect the borrowing and saving rates they see every day.

By raising rates, the Fed makes it more costly to use financing, causing people to borrow and spend less, effectively pumping the brakes on the economy and slowing down the pace of price increases.

“Unfortunately, the economy will slow much faster than inflation, so we’ll feel the pain well before we see any gain,” said Greg McBride, Bankrate.com’s chief financial analyst.

Already, “mortgage rates have rocketed to 16-year highs, home equity lines of credit are the highest in 14 years, and car loan rates are at 11-year highs,” said McBride.

How Higher Rates Affect Borrowers
Even though 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a home has lost considerable purchasing power in part because of inflation and the Fed’s rate hikes.

30 Year Fixed Rate Mortgage Comparison For A $300,000 Loan
Dec 2021 Nov 2022
Rate / Payment Rate / Payment
3.11% / $1,283 7.08% / $2,012
That’s an extra $729 a month, an increase of $8,748 per year, and $262,440 more over the lifetime of the loan, according to LendingTree.

The increase in mortgage rates since the start of 2022 has the same impact on affordability as a 35% increase in home prices, according to McBride’s analysis.
“If you had been approved for a $300,000 mortgage in the beginning of the year, that’s the equivalent of less than $200,000 today.”

Interest rates for adjustable rate mortgages and home equity lines of credit are pegged to the prime rate, and will also eventually increase. Most ARMs adjust once a year, but a HELOC adjusts right away.

Meanwhile, consider boosting your emergency savings since savings rates have also increased. Sleep better at night knowing you have some money tucked away just in case.

Call me to discuss your options for a refinance or financing your next home!
Source: www.cnbc.com

Understanding Inflation and Mortgage Rates

This year, inflation reached a high not seen in forty years. The average consumer felt
the pinch at the gas pump and in the grocery store. It has also impacted the ability
of some buyers to save money to buy a home.

When the inflation rate was higher than expected in late summer, concerns about
recession were fueled, prompting the Federal Reserve’s decision to raise the Federal
Funds Rate in late September.

Fortune magazine explains:
“As the Federal Reserve moved into inflation-fighting mode, financial markets quickly put
upward pressure on mortgage rates. Those elevated mortgage rates … coupled with skyhigh home prices, threw cold water onto the housing boom.”

The Rise of Mortgage Rates
In light of growing economic pressures, the average 30-year fixed rate mortgage
recently surpassed 6% for the first time in well over a decade.

The mortgage rate increases this year are the big reason buyer demand has pulled
back in recent months. As rates rose, so did the cost of buying a home and some
buyers were priced out of the market.

Looking Ahead
The relationship between inflation and mortgage rates is simple.

When inflation is low, mortgage rates tend to be lower. When inflation is high, rates
tend to be higher.

Sam Khater, Chief Economist at Freddie Mac, commented:

“Mortgage rates remained volatile due to the tug of war between inflationary pressures and
a clear slowdown in economic growth. The high uncertainty surrounding inflation and
other factors will likely cause rates to remain variable…”

Bottom Line
Rising inflation and higher mortgage rates have had a clear impact on housing.
Contact me for insights on the latest trends in the housing market and what they
mean for you.

www.keepingcurrentmatters.com

How To “Buy” A Lower Interest Rate

It’s no secret that buying a house is an expensive undertaking. While interest rates have recently increased, there’s actually something you can do to ensure your mortgage payments are more manageable. By paying more money upfront, you can lock in a lower interest rate on your mortgage.

What is a rate buydown?

Buydowns are easy to understand if you think of them as a mortgage payment subsidy.

Buydown funds can subsidize the loan payments during the first years of the mortgage, resulting in a temporary lower monthly payment, or reduce the interest rate for the life of the loan. This lower payment may allow you to qualify more easily for your mortgage.

The costs associated with the buydown are negotiated with the lender and often paid at the time of closing.

Because mortgage rates may continue to rise in 2022, the buydown method can be a useful tactic to offset rate hikes.

Buyers

Home buyers can pay upfront fees to the lender to obtain a lower interest rate for the first few years of the loan, or the entire loan term, depending on the buydown structure.

Sellers

Sellers can also pay to buy down a buyer’s interest rate as an incentive to purchase their home. A seller concession is negotiated in the contract for the amount of funds needed to accomplish the buydown on behalf of the buyer.

Builders

Like sellers, builders may also offer to pay the costs to buy down the buyers’ interest rate. Builders offer these incentives to entice buyers to purchase properties in their newly built communities.

Is a buydown right for you?

Whether it makes sense to choose a buydown when buying a home can depend on several factors:
• The interest rate for which you qualify
• The amount you could save in interest over the loan term
• Your estimated future income
• How long you plan to remain in the home.

Buydowns require paying more money upfront so you can save money in the long run. Therefore, buydowns are more beneficial if you intend to own the home for an extended period of time.

Not every mortgage is eligible for a buydown. For example, you can’t use a buy-down to purchase an investment property or for a cash-out refinance.

Let’s talk about how an interest rate buydown could help you purchase your next home!

Sources: investopedia.com, rocketmortgage.com & dailynews.com

Signs of Market Easing

While inflation, interest rates and talk of a global recession have real estate markets in flux, there are also signs of market easing.

Affordability
Lawrence Yun, National Association of REALTORS® chief economist, recently testified on Capitol Hill concerning the current real estate market. Yun’s main points included:
• The inventory crunch will continue to chip away at affordability and sideline more buyers.
• Though growth in home prices is slowing, a nationwide decline is unlikely.
• While the potential for weaker sales may help increase housing inventory in some markets, it won’t be enough to ease affordability constraints.

Research commissioned by the National Association of REALTORS® indicates a national deficit of 6 million housing units. This decades-in-the-making phenomenon has helped sustain year over-year price growth for a record 124 consecutive months, according to NAR housing reports.

In his Capitol Hill comments, Yun said, “This affordability crunch is felt most acutely as we move down the income scale and by minority households… That is why housing supply must be addressed to moderate gains in home prices and rents.”

Home Prices
Higher mortgage rates and an increase in housing supply are factors that typically put downward pressure on home prices. But the market continues to be quite resilient, and costly In June, the national median listing price for single-family homes was $450,000, up 16.9% from the same time last year and more than 31% from
June 2020, according to Realtor.com.

With homes nearing half a million dollars, some buyers have stepped back from the market.

Mortgage applications dropped to the lowest level at the end of June, marking the biggest slump in 22 years, according to the Mortgage Bankers Association (MBA).

Despite some homes with higher list prices showing signs of extended time on the market, the overall lack of inventory is still leading to price gains. “Even after
reductions, prices are still higher compared to one year ago and much higher compared to before the pandemic,” Yun indicates.

Inflation And Interest Rates
Inflation eased slightly in July, which could bode well for the housing market in the months ahead, says Yun. Yun notes that interest rates, which had been consistently in the 4% to 5% range in the decade preceding COVID-19, hovered near record lows of around 3% throughout much of 2020 and 2021.

Consumer price inflation showed signs of deceleration in early summer.

Could the worst of sky-high inflation be behind Americans? Yun thinks so. By midsummer, gasoline prices began to decline, and there was more production of
apartments and single-family homes.

Yun predicts that consumer prices will pull back, encouraging the Federal Reserve policy to be less aggressive, resulting in lower mortgage rates.

The 10-year Treasury yield in mid-August stood at 2.7%. “That should translate into 30-year mortgage rates pulling back to under 5%,” Yun says. Some recent potential
home buyers who were pushed out of the market may then be able to qualify for a mortgage and a new home.

Inventory And Market Easing
There are bright spots in the market, such as gradually increasing inventory, which is good news for consumers.

Market trends point to a shift towards a more healthy market where both sellers and buyers have advantages.

Homebuyers are finding more selection and a little more time to make decisions. Sellers are adjusting to having their home on the market longer, and pricing their
home to align with the current market.

With so many variables affecting the current real estate market, let’s talk about how to accomplish your goals with your next home purchase or sale!

Sources: magazine.realtor, www.globeandmail.com, www.forbes.com

What’s Ahead For Real Estate in 2022?

The housing market is at a turning point, and if you’re thinking of buying or selling a home, you may have questions.

Is it still a good time to buy a home?
Should I make a move this year?
How does the remainder of 2022 look for residential real estate?

Mortgage Rates Are Subject To Inflation
While buyers question where mortgage rates will go in the months ahead, there is no crystal ball to foretell what will happen. What housing market experts know for sure is that the record-low mortgage rates during the pandemic were an outlier, not the norm.

In 2022, rates have climbed over 2% due to the Federal Reserve’s response to rising inflation. Greg McBride, Chief Financial Analyst at Bankrate, explains:

“Until inflation peaks, mortgage rates won’t either. Without improvement on the inflation front, we don’t know where the interest rate ceiling will be.”

The Supply of Homes for Sale Is Projected To Increase
This year, particularly during the spring, the number of homes for sale in the US increased. That’s partly due to more homeowners listing their houses, but also because higher
mortgage rates helped reduce buyer demand. As buyer demand moderates, inventories rise.

Experts say that growth will continue. Recently, realtor.com increased their 2022 projections for inventory gains dramatically from a 0.3% increase at the beginning of the year
to a 15.0% jump by the end of the year.

While an increase in home selection is great news, there is no sudden surplus of inventory on the horizon. Housing supply is still low. Finding a home will still be a challenge, but not as difficult as it has been over the past two years.

Home Price Appreciation Will Continue
Due to the imbalance between the number of homes for sale and the number of buyers, the pandemic led to record-breaking increases in home prices. According to CoreLogic, homes appreciated by 15% in 2021, and they’ve continued to rise this year.

Selma Hepp, Deputy Chief Economist at CoreLogic, explains why the housing market will see deceleration, but not depreciation, in prices:

“The current home price growth rate is unsustainable, and higher mortgage rates coupled with more inventory will lead to slower home price growth but unlikely declines in home prices.”

If you’re thinking about buying your first home or you’re ready to make a move, it may make sense to do so now before prices climb higher.

Contact me and let’s work together to determine the best plan for your move.

Source: KeepingCurrentMatters