The housing market can be affected by many different factors, including government regulations, the economy, and inflation. One of the most influential players in these factors is the Federal Reserve (Fed), which has the power to raise or lower interest rates and take many other actions that can impact the housing market. In this post, we’ll take a closer look at how the Fed’s recent decisions are affecting the housing market and what you need to know if you’re considering buying a home.
The Fed is trying hard to reduce inflation. And even though there’s been 12 straight months where inflation has cooled (see graph below), the most recent data shows it’s still higher than the Fed’s target of 2%:
While you may have been hoping the Fed would stop their hikes since they’re making progress on their goal of bringing down inflation, they don’t want to stop too soon, and risk inflation climbing back up as a result. Because of this, the Fed decided to increase the Federal Funds Rate again last week. As Jerome Powell, Chairman of the Fed, says:
“We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored.”
High inflation and a robust economy have an impact on the Fed’s recent decision, according to Greg McBride, Senior VP and Chief Financial Analyst at Bankrate
“Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more.”
Although a Federal Funds Rate increase by the Fed doesn’t directly affect mortgage rates, it does have an effect. As stated in a recent Fortune article:
“The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”
How All of This Affects You
In the simplest sense, when inflation is high, mortgage rates are also high. But, if the Fed succeeds in bringing down inflation, it could ultimately lead to lower mortgage rates, making it more affordable for you to buy a home.
This graph helps illustrate that point by showing that when inflation decreases, mortgage rates typically go down, too (see graph below):
According to the data above, inflation (represented by the blue trend line) is gradually declining, and based on past patterns, mortgage rates (represented by the green trend line) are probably going to follow. Regarding the potential direction of mortgage rates, McBride says:
“With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably.”
If you’re planning on buying a home in the near future, it’s important to pay attention to the Fed’s decisions and the overall state of the economy. If interest rates are on the rise, it may be more difficult to obtain a mortgage or afford the payments on a higher interest rate loan. On the other hand, if interest rates are low, you may be able to find more affordable options and save money over time.
In addition to interest rates, the Fed’s actions can also impact the overall state of the economy and the availability of jobs and housing in different areas. For example, if the Fed raises interest rates too quickly, it could lead to a recession and a decrease in jobs and housing availability. If the Fed keeps interest rates too low for too long, it could lead to inflation and a decrease in the value of your home over time.
Overall, understanding how the Federal Reserve affects the housing market is an important part of being a homeowner or a prospective buyer. By paying attention to the trends and staying informed about the economy, you can make smarter financial decisions and take advantage of opportunities when they arise. Whether you’re buying your first home or upgrading to a larger space, it’s always important to stay up-to-date on the latest news and take a holistic approach to your investments.
