The most recent rate hike brings the Fed’s target funds rate (the rate which banks borrower from the Fed and each other) to a range of 3-3.25%, a full 3% higher than 0-.25% range we saw prior to inflation kicking in late last year.

This also moves the “prime rate” (a very important metric to the overall economy) up to 6.25%, also 3% higher than last year’s lows as the prime rate, unlike mortgage rates, does more in direct proportion to the fed funds rate.

What does this mean for mortgages and home financing?

The Fed’s moves are closely watched by mortgage bond traders (and mortgage bonds, or mortgage backed securities, are what directly influence our rates), and just as important as the Fed’s move on rates is their commentary after announcing their rate decision.  The market reaction to this Fed move was mortgage interest rates moving initially higher (opposite to the market reaction of the last Fed rate hike of the same amount back in June!), as the market’s seem to doubt the Fed’s ability to reign in stubborn inflation.

Historically, though, Fed funds rate increases are usually followed (sometimes quickly) by recession, which historically has brought rates back down to earth.  While no one has a crystal ball, with pending recession grabbing more headlines, it seems like history may repeat itself, but that remains to be seen as the Fed’s rate hike will typically take a few months to be absorbed and show it’s impacts in the broader economy.

What Does The Fed Rate Hike Mean For the Broader Economy?

With a Fed rate hike, the ‘prime’ rate increases, and many household financial products are tied to prime, most often credit cards and home equity lines of credit (HELOCs).  So these products will get more expensive and will likely be the biggest direct impact households will immediately see & feel.

Higher borrower costs tend to mean less borrowing and a slowdown to the broader economy, so over time the Fed rate hikes should reduce inflation, which is a good thing!  The negative side of the equation is that while reducing inflation, the economy usually slows and often ends up in recession.  With inflation hitting so many households in the wallet this year, though, the Fed’s primary concern is to reign in inflation and lower costs for US households.  If their actions do cause a recession and a spike in unemployment numbers, their focus will shift, but for now, we can expect the Fed funds rate to continue to increase and remain at higher levels until we start seeing inflation numbers come down.

Is Housing a Concern?

Housing is certainly seeing a shift in 2022 from the insanity of quickly appreciating values in 2020-2021, but inventory is still below historical levels, so the market has some room to absorb reduced demand without a huge impact.  Again, while no one has a crystal ball, the numbers seem to support strength in the housing market, even if we do see a slowing in appreciation or some slight depreciation in some markets.  The greater concern for the housing market is interest rates, which have hurt affordability in housing, as even with rising prices, low rates can keep housing payments down.  If we see rates drop as inflation comes down, it could bring more home buyers to market.

The Fed has states they plan to continue to raise rates until inflation shows sustained improvements, and they have made fighting inflation their primary focus for the short term.  What the overall impacts will be and the direction of the economy as a result of their actions remain to be seen, we’ll be sure to provide up to date info on the state of housing, rates, and how the Fed’s actions are impacting our markets.

The post Sept 21, 2022 Fed Rate Hike appeared first on Christie Mitsumura Blue Seas Team.

For mortgage rates

There’s a common misconception that the Fed raising rates with a Fed rate hike leads to higher mortgage rates, but it’s important to understand what drives mortgage rates.  The price of mortgage backed securities (MBS) are the only thing that directly move mortgage rates, and MBS often see an improvement (improving rates, aka bringing them down) when there’s a Fed rate hike.  Today was no exception.  The reason for this is that the Fed rate hike is a measure implemented to slow down the economy and to fight inflation.  High inflation is a major cause of increasing mortgage rates (and is one of a few reasons we’ve seen mortgage rates go up so much in 2022!), so the Fed’s actions should theoretically reduce inflation, helping mortgage bonds, and thus lowering mortgage rates.

In fact, since the Fed’s last rate hike in June, mortgage bonds have improved substantially, and mortgage rates have come down from their highs.

For other debts

Some debts are directly impacted by a Fed rate hike.  Home equity lines of credit (HELOCs), for example, are often tied to the prime rate, which moves in step with the Fed funds rate.  Because the prime rate goes up and down with each Fed rate hike, HELOC rates will move as well, and for that reason, rates on HELOCs will immediately go higher on the Fed announcement.  Other debts tied to the prime rate will do the same.  For this reason, consumers can expect their credit card payments to increase as most credit cards have their interest rates tied to prime.

For the broader economy

Fed rate hikes historically precede periods of recession.  The Fed’s action reduces inflation, but it also makes borrowing costs of financial institutions more expensive.  This tends to slow down borrowing and spending, which in turn slows down the economy.  In today’s marketplace the Fed has made it clear that fighting inflation is their #1 objecting, and the broader economy, while of concern, is being focused on less than reigning in stubborn, persistent inflation that was once thought to be “transitory”.

The Fed rate hike has many implications, but it’s very important to know that the Fed is NOT raising mortgage rates, and in fact, their actions typically lead to lower rates.  That’s important to understand today, because with mortgage rates spiking in early 2022, we’ve seen an increase in inventory on the market as many buyers have been forced to the sidelines.  Interest rates coming down could present a great opportunity for many buyers who now have less competition in the market and more inventory to choose from.  The Fed has also made it clear that their expectation is for more rate hikes throughout 2022 and beyond, so if the markets behave as expected, we may see some great opportunities with lower rates in the mortgage space in the months ahead.

The post The Lastest Fed Hike appeared first on Christie Mitsumura Blue Seas Team.

There is often a lot of confusion around the Fed Rate Hike and how it actually affects the mortgage market, so we hope to clear up some of the common misconceptions.

1. No, mortgage rates do not go up when the Fed Rate Hike happens

Mortgage rates are influenced by many things, but one of the biggest factors in the percentage rate offered to mortgage applicants is inflation.  When inflation is high (as it has been for all of 2022 thus far), mortgage rates are higher.  When inflation is reduced, mortgage rates usually come down with it.  Since the Fed rate hike is intended to reduce inflation, the result is often reduced mortgage interest rates, though sometimes it takes time for rates to come down a noticeable amount.  Today, however, the mortgage bond markets gained huge ground upon the Fed rate hike announcement and commentary, so improvements in rates were felt almost immediately for mortgage applicants.

2. Other debts will get more expensive, immediately.

The “prime rate” is tied directly to the Fed funds rate, and many of the most common types of debt are tied to prime.  Credit cards and home equity lines of credit are two of the most common debt vehicles that do go up and down based on the Fed movements, so with the latest Fed rate hike, it can be expected that credit cards and home equity line of credit rates will see an identical .75 percent increase in their cost.  Since more fed rate hikes are expected throughout 2022 as the Fed continues to fight inflation, it can be expected that this revolving debt will continue to get more expensive on a monthly basis for anyone carrying this type of debt.

3.  Does a Fed rate hike mean recession?

Recession has been a hot headline recently, and for good reason.  Many economic indicators currently point toward the US being in or heading toward a recession, however Fed rate hikes don’t necessarily mean recession.  It’s important to note though, that rate hikes usually lead into recession.  The reason is that higher rates cool off a hot economy by making borrowing more expensive.  When borrowing is more expensive, there tends to be a ripple effect in the economy that often hits the job market (leading to increases in unemployment), and slows inflation, cooling the GDP and often leading into consecutive quarters of negative economic growth, which is the technical indicator of recession.  Since we don’t know we’re in recession until we have 2 consecutive quarters of negative GDP, it’s impossible to say if we’re in a recession or will be soon, but it’s likely the Fed rate hike (and subsequent rate hikes) could point toward recession sooner than later.

4.  Does the Fed rate hike impact other rates and payments?

Through the same ripple effect, the Fed’s actions indirectly affect many aspects of the economy, but what the Fed funds rate actually is, is nothing more than the rate banks borrow from each other and from the Fed.  When banks are borrowing for free or nearly free, as we’ve seen over the past several years, it allows them to offer lower rates and still profit.  When their borrowing costs go up, to maintain the same margins of profit, the rates they offer consumers also have to increase, which is why borrowing becomes more expensive almost across the board.  Mortgage rates are somewhat of an exception because of the impact Fed rate hikes have on inflation that we noted above.

5.  How low will mortgage rates go?

No one has a crystal ball when it comes to mortgage rates, but historically in times of a Fed rate hike, and moreso in times of recession, interest rates decline.  2022 has brought some of the steepest increases we’ve ever seen in terms of how quickly rates have risen, and it remains to be seen if a decline could be just as steep, especially considering the weird market conditions related to COVID-19 that brought us the historically low rates of 2020 and 2021.  If you’re considering applying for a loan, your best bet is to talk with a MasonMac loan officer to determine which options are presently available, and what type of loan product and rate best fits your financial needs!

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