On Wednesday, June 14, the Federal Reserve increased the short-term benchmark rate by 0.75%. This Fed June rate hike was the most significant rate increase since 1994, and economists remarked that it would considerably impact the housing market by shrinking buyer pool. Housing market analysts noted that interest rates are increasing faster than predicted at the beginning of 2022.
The Federal Reserve implemented the fed June rate hike to curb runaway inflation affecting consumers. The price increases of fuel, food, utilities, and consumer goods have far outpaced predictions. Inflation is at its highest rate in 40 years, and this interest rate increase may slow its pace. The lead economist at the National Association of REALTORS®, Lawrence Yun, predicted that the Federal Reserve would institute more rate hikes throughout 2022.
Over the past six months, the short-term benchmark rate went up by 175 basis points. For a person looking to buy a $300,000 home, this Fed June rate hike means that the typical monthly payment went from $1,265 if purchased in December 2021 to $1,800 if the home was purchased today. This kind of payment increase will shrink the pool of potential buyers.
Yun explained that the number of home buyers has been dropping in recent months. High prices, low inventory, and inflation in other areas of necessary expenses have conspired to make it more difficult for a typical first-time home buyer. Yun expects sales to dip more due to the Fed’s June rate hike. While sellers have had a field day with bidding wars, waivers of inspections, and multiple offers on homes in dire need of repairs and upgrades, they may have to price their homes more competitively or perform other actions to sweeten the deal for buyers. When inflation slows, mortgage rates should stabilize.
Inflation has curbed buying power in nearly all areas of the economy, with vehicles, food, tuition, rent, and healthcare costing more than ever. As of June 20, the 30-year fixed mortgage rate hovered around 5.23%. One year ago, the rate was just 2.98%. Home buyers have not seen interest rates above 6% since 2008. That means a whole generation of home buyers has enjoyed these low-interest rates. Ongoing volatility in interest rates may scare off even more home buyers as they wonder whether or not now is a good time to sink so much money into a purchase.
The impact of the Fed June rate hike is crystal clear. The monthly payment for a $500,000 home with a 3% interest rate is the same as a $335,000 home with a 6% interest rate. That means home buyers will get less house or a home in a less-desirable neighborhoods for the same amount of money. Some home buyers are also getting priced out of the market.
Overall, the Federal Reserve committee appears hopeful that inflation will trend down during the third and fourth quarters of 2022. Job gains and low unemployment rates are two critical pieces of data supporting their opinions. Even so, they expect more actions like the Fed June rate hike throughout 2022.