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The Federal Reserve’s decision to implement the biggest interest rate hike since 1994 could mean some tough conversations between potential homebuyers and their mortgage lenders.
Federal Reserve officials raised their main interest rate Wednesday by three-quarters of a percentage point and signaled that they will keep hiking aggressively this year to restrain inflation. While the Fed’s decision does not directly affect mortgage rates, lenders have increased rates in recent weeks in anticipation of this and future moves.
Since December, the average rate for a 30-year fixed-rate mortgage loan has soared from 3.05% to 5.78%, according to Freddie Mac. That changes the math significantly for homebuyers.
On a $300,000 mortgage, the monthly payment has risen from $1,265 in December to $1,800 today, according to the National Association of Realtors.
Adam Perdue, an economist for the Texas Real Estate Research Center at Texas A&M University, said the Fed is facing a tightrope walk between raising rates fast enough to tamp down inflation without raising rates too fast and causing a recession. Whatever happens with interest rates could dramatically shift the housing market.
“If we manage to get back to a normal economy, then then we would expect [home] price appreciation to fall for a few years until we get back to our trend line,” Perdue said. “If they end up pushing it too far and we end up in a recession, we might actually see prices fall.”
Demand is still incredibly strong but cooling as the higher rates and inflation make homes out of the reach of more buyers in conjunction with still-escalating home prices. The cost of a single-family home in the metro area reached a new high of $438,000 in May.
Home lending activity for new purchases in Dallas-Fort Worth fell about 20% year over year last quarter, according to Attom Data Solutions. Refinancing was down 45%.
“The only way somebody’s rate-term refinancing right now is that they’re getting divorced and they have to refinance,” said Rodney Anderson, a mortgage lender for Supreme Lending.Related:D-FW finally sees an influx of home listings, but median price soars to $438,000
All buyers are feeling pressure on their budgets, whether it’s because of the stock market, interest rates or home costs, Anderson said.
“Consumers right now are sitting there going, what’s going to hit me next?”
Mark Raskin, a senior loan officer for PrimeLending, said potential homebuyers who have not spoken with their lenders recently should revisit them to make sure they’re still comfortable and qualified at whatever the payment would be based off current rates.
“If that payment goes up $300 or $400, it would be very, very annoying to somebody that is buying a $600,000 or $700,000 house, but it could be a make it or break it for somebody as a first-time homebuyer,” Raskin said.
Raskin said rates may continue to go up over the next six months unless there is a recession, which could bring them down to some degree.
“In my opinion, [a recession] will not bring the rates back down to what we saw last year and the year before, because those were artificially lowered by the government,” Raskin said.
Most experts polled by Zillow in a recent survey said they expect a recession could begin in 2023, but they don’t believe the U.S. housing market is in a bubble.
“Americans have seen home values rise at record rates over the past few years. But although a recession is looking more and more likely, the housing market today is a far different beast than what we saw in the mid-2000s,” Zillow economist Nicole Bachaud said in a statement. “Unlike in 2006, this market is underpinned by strong fundamentals and has been built on mortgages with sound credit, factors that won’t change in the near term.”