The Federal Reserve made a significant move in the last week which will drastically change the housing landscape over the next year. The Federal Open Market Committee (FOMC) members unanimously approved an accelerated reduction in bond purchases which will see the program likely end in Spring 2022—a full two years since the Fed started purchasing Treasury bonds and mortgage-backed securities (MBS) to bolster the economy through the pandemic. Directly after that bond purchase tapering ends, the FOMC expects to start raising interest rates with the potential for three rate hikes in 2022, two in 2023 and two more in 2024.
It’s important to remember the interest rate that the Fed controls is not the interest rate you pay on your mortgage. The two are not directly related. The interest rate the Fed is talking about is also known as the overnight lending rate or benchmark lending rate. That is the interest rate that banks pay when they borrow money. Consumers feel the rate hikes in the form of credit card interest rates or personal loans. For nearly two years the Fed has kept the overnight lending rate at or near 0% in order to make it cheaper for banks to borrow money, therefore hopefully passing those same savings on to consumers. The FOMC did not indicate how much the rate would be raised but it’s likely to be a slow rise.
What will affect mortgage rates is the deceleration of Treasury bond and MBS purchases. We’ve discussed this ad nauseam in this Market Update for weeks because it is an extremely important part of the housing market. The Fed’s purchase of MBS has helped keep mortgage interest rates low and steady because it has provided a consistent, stable purchase option for mortgage originators. When that buyer goes away, the demand slows down which forces the supply to make itself more attractive. In this case that would mean higher mortgage interest rates for homebuyers.
We have already seen the effects of slowly rising rates as the refinance volume has slowed considerably. The Mortgage Bankers Association notes that for the week ending Dec. 10, refinance applications were down 41% from a year earlier. For the week of Dec. 16, Freddie Mac notes the 30-year fixed-rate mortgage average moved up to 3.12%. Keep in mind this is not a drastic rise in rates by any means and it’s an average across originators. So your individual interest rate may be lower based on your loan type, credit history and your outstanding debts among other factors.
Rising rates combined with high home prices and limited inventory make it more important than ever to understand your financial situation before you get discouraged about the environment. There are a variety of home loan programs to fit myriad financial situations and could end up costing you much less than you would think. There is still a misconception that you absolutely have to have a 20% down payment in order to buy a home. With some programs, you can pay as little as 3.5% down and others you don’t have to have a down payment at all. With all of the changes heading into 2022, it is paramount that homebuyers talk to a Movement Mortgage loan officer in their area to get a complete picture of what’s possible.
**Please note due to the Christmas and New Year holidays the Market Update will return on Jan. 7, 2022.