07/5/22

A summer update on interest rates

Recently, we talked to you about rising interest rates and what they meant when it came to home buying power. A lot has happened in the market since, so we wanted to give you a quick update on how the housing market has reacted.

What Is the Fed Doing?

First a reminder: The Fed announced that they would begin raising interest rates in March to combat rising inflation. It raised rates by 50 basis points (0.50%) during their meetings in both March and May. Many expected another 50 point increase during their June meeting, but as inflation continued to rise to 8.6% in May, the Fed chose a more aggressive path, raising rates by 75 basis points, the largest increase since 1994.

How Did the Housing Market Respond?

When the Fed first raised interest rates, the average 30-year fixed mortgage rate jumped from 3.2% to 5.1% between December and April. Observers hoped this would be the peak and rates would stabilize alongside inflation. Indeed, mortgage rates even began to fall throughout May amid expectations that inflation was starting to decline. However, mortgage rates moved above 6% in mid-June. 

So What’s The Good News?

Good question. We know a lot of this sounds like a bummer, but there is definitely a bright side! Here are the three top reasons to remind optimistic about the current housing market:

  1. Historically speaking, mortgage rates are still low. Interest rates below 5% are mostly a post-Great Recession phenomenon. From 1970 to 2008, the average 30-year fixed mortgage rate never fell below 5% and was as high as 18.5% in 1981. Mortgage rates lately have been rising historically quickly, but to historically normal levels.
  2. Housing inventory is finally rising. Buyers over the past few months have faced a painful combo: rising mortgage rates and rising prices due to historically low housing inventory. Now with demand slowing down, housing inventory increased in May for the first time since June 2019. Higher inventory and higher interest rates mean prices will stabilize over the coming months, a welcome relief to buyers after they’ve seen a record 20.6% spike in prices over the past year.
  3. It’s a correction, not a crash. Our main prediction for the future remains the same. The last two years of low inventory and low interest rates have kept demand high while prices skyrocketed. Instead of tanking prices, higher rates and inventory should stabilize prices and bring equilibrium to the housing market so both buyers and sellers can thrive. 
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