November 14, 2022
The Federal Reserve has been hiking interest rates for most of 2022. We’re now starting to see the nasty ripple effects of these moves.
The average rate on the 30-year fixed mortgage, which is one of the most popular home loans, climbed to more than 7%, its highest level since August 2008. As the Fed keeps raising rates to fight inflation, the housing sector will continue experiencing pain. Fed Chair Jerome Powell even called out the housing market, saying it would probably go through a correction after years of price jumps.
Not surprisingly, the jump from an average mortgage rate near 2.7% in 2021 to more than 7% today has resulted in fewer applications for mortgage loans and less demand for homes. Home sales fell for the seventh straight month in August. Also, sales fell 0.4% from July and 19.9% from the year before.
All in all, this isn’t a great setup for housing. After years of price rises, it seems we’re flipping from a seller’s market to a buyer’s market. That’s great for those looking for a home, but not so great for the economy as a whole.
It’s true the Fed needs to clamp down on the runaway inflation. But we’re starting to see now that when one interest rate rises, it can have profound effects on other areas of the economy. And if the Fed doesn’t get this fix right, the attempted cure could be worse than the original disease.