Mar 22 2023

The Fed hikes again: Did you just get priced out?

federal reserve

The Federal Reserve raised its rate for the second time in 2023. Can you still afford to buy a house?

The Federal Reserve just announced its second benchmark rate increase of the year. If you’re in the market for a house, does this mean you’re priced out?

Not necessarily. The Federal Reserve’s relationship with mortgage rates isn’t as cut-and-dried as most people think. This means that a Fed rate hike won’t directly cause mortgage rates to rise any further. And while it’s true that higher mortgage rates add to the cost of buying a house, other factors also come into play that can help to decrease your monthly mortgage payment.

When the Fed hikes rates, how are mortgage rates affected?

The Federal Reserve’s benchmark rate doesn’t impact mortgage rates directly. Instead, a Fed rate increase has an indirect effect on mortgage rates—and not always in a predictable direction.*

It’s helpful to know that:

  • Movement of the federal funds rate dictates the short-term cost of borrowing; this includes credit card interest, car loans, HELOCs, and adjustable-rate mortgages.
  • Fixed mortgage rates move more closely with the 10-year Treasury rate. The projection for the Treasury rate is usually considered to be a reliable indicator of where mortgage rates may be heading.
  • The Federal Reserve influences mortgage rates indirectly by purchasing government bonds and MBS (mortgage-backed securities).

The Federal Reserve increasing rates once again is another step in the continued fight against inflation. You can read more about this here, as well as about how homeownership can be a reliable hedge against inflation. Higher mortgage interest rates are generally seen in times of inflation. An economic slowdown or recession can have the opposite effect, potentially triggering a mortgage rate decline.

“The Federal Reserve has been reducing its balance sheet and raising its benchmark rate in an effort to tame inflation,” Odeta Kushi, First American Deputy Chief Economist, explained. “That has resulted in higher 10-year Treasury yields, which has resulted in higher mortgage rates.”

Unwieldy mortgage rates can naturally cause anxiety, especially for homebuyers preparing to purchase. But from a broad perspective, current mortgage rates are still below the historical average.* Forecasts also suggest that mortgage rates will continue to moderate and potentially decrease in the year ahead.

No matter what rates are doing, it’s possible to find a mortgage you feel good about. Get started now.

Does a Fed rate hike mean you’re priced out?

Right now, affordability is a major concern among today’s homebuyers. But if rates drop as anticipated, affordability is only expected to improve. “If mortgage rates fall… by the end of 2023 as an average of leading industry forecasts suggest, house-buying power would increase by $25,500 compared with December 2022,” Mark Fleming, First American Chief Economist, said.

Even with rates as they are today, there’s something to be said for buying a house in a market with less competition. When mortgage rates were ultra-low a few years ago, many buyers got caught up in bidding wars and ended up paying an inflated home price. Today’s buyers may have more time to browse and make a competitive offer. A seller may also be more likely to agree to concessions that can help to lower upfront costs.

Beyond the rate, there are several other variables that can influence your monthly payment. These include your credit score, loan term, loan type, loan amount, and down payment.  

When you meet with your Academy Loan Officer, they can give you insight into:

  • Which credit score range could help you qualify for a lower mortgage rate.
  • Which down payment amount could save you on your monthly mortgage, as well as which no/low down payment loans and down payment assistance programs you might qualify for.
  • How a shorter loan term may reduce your total loan costs and interest rate.
  • Which mortgages and specialty programs (like a Temporary Buydown) might help reduce your rate.

So, when it comes to affordability, it’s about more than the rate. Working with a skilled Loan Officer will give you a clear view of the many options you may have for making your monthly mortgage payment cheaper.

The good news? “…housing affordability should improve,” Taylor Marr, Redfin Deputy Chief Economist, said. “Mortgage rates will eventually come down as the Federal Reserve makes progress fighting inflation, and home prices have already begun falling. Incomes are also growing faster than the historical norm.”

If you haven’t gotten a personalized assessment yet:

Then you may not know how affordable your monthly payment could be. You also might not be aware of which affordable mortgage options and down payment assistance programs are available to you. Contact your local Academy Loan Officer to find out.

Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. Not all applicants will qualify. MAC324-1485829.