How Rising Mortgage Rates Affect You

Prices of homes have soared due to low rates, but now the tables have turned.

Mortgage Rates Rise

On Friday, March 25th the average rate on the 30-year fixed mortgage increased 24 basis points rapidly to 4.95%, which is 164 basis points higher than it was one year ago.

This rise was quicker-than-expected and has weighed on the demand for mortgages and refinancing loans since the median mortgage payment is now 20% higher than it was a year ago.

The Federal Reserve’s Impact on Rates

The Federal Reserve began to hike the effective federal funds rate (EFFR) on March 16th which has transferred over to the real estate market. The first hike they did was a small 25 basis point hike. Further rate hikes will be discussed at future Fed meetings.

Since the Covid-19 pandemic started the Federal Reserve lowered the federal funds rate to almost 0 and began buying 10-year treasury notes. When you hear people say that the Federal Reserve is “printing money,” they are simply just creating credit out of thin air by purchasing these treasury notes.

This means the Fed is giving banks more money to lend. To effectively lend it all out, banks reduce lending rates to make borrowing more attractive. This makes all types of loans for cars, college, and homes less expensive. Even credit card and interest rates are lowered incentivizing consumer spending.

The Federal Reserve stops printing money

Now that the pandemic has essentially come to an end, they are beginning to increase rates and are no longer purchasing these 10-year notes.

Additionally, the Federal Reserve is planning to sell off these 10-year notes from their balance sheet meaning the banks are no longer going to have the excess liquidity to lend out. This combined with higher rates is most likely going to decrease the number of people willing to take out loans and spend their money.

Is It Too Late?

These measures are used to combat inflation but unfortunately, inflation has already spiraled out of control. Prices of homes have soared and rents are rising while loans are not looking nearly as attractive as before, meaning there should be a decrease in overall demand.

The Federal Reserve’s overuse of expansionary monetary policy or “money-printing” is most likely the cause for the rapidly increasing inflation levels. This is one of the consequences of using too much expansionary monetary policy, and to counteract inflation, the Federal Reserve must now employ contractionary monetary policy.

Contractionary monetary policy is when the Federal Reserve begins to raise rates and begins to sell off its holdings of treasuries and other bonds. Doing this will decrease the money supply and will cool down economic growth to slow down inflation.