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Samuel Corum/Getty Images November 02, 2022 Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal. Troy Segal is Bankrate's Senior Homeownership Editor, focusing on everything from upkeep and maintenance to building equity and enhancing value. Bankrate logo

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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. New month, new meeting — but the same result: The Federal Reserve’s raised interest rates again. In an effort to rein in raging inflation, the Fed boosted interest rates in March 2022, and again early May. It raised them even more in June, by — which was, at the time, the largest Fed rate hike since 1994. An additional three-quarter-point hike was announced in July and September. And now the Fed has raised rates , announcing yet another three-quarter-point hike in the federal funds rate Nov. 2. The in a year was in the 1980s. The hikes are designed to cool an economy that was on fire after rebounding from the coronavirus recession of 2020. That dramatic recovery has included a red-hot housing market characterized by record-high home prices and microscopic levels of inventory. However, since late summer the, with appreciation slowing nationally and prices even dropping in some markets. And home prices are driven not just by interest rates but by a complicated mix of factors — so it’s hard to predict exactly how the Fed’s efforts will affect the housing market. “The housing recession is here,” says Marty Green, principal at mortgage law firm Polunsky Beitel Green. “The big question now is how quickly it spreads to the rest of the economy.” Higher rates are challenging for both homebuyers, who have to cope with steeper monthly payments, and sellers, who could experience less demand and/or lower offers for their homes. “The cumulative effect of this sharp rise in rates has cooled the housing market and caused the economy to start slowing, but hasn’t done much to lower inflation,” says Greg McBride, CFA, Bankrate’s chief financial analyst.

How the Fed affects mortgage rates

The does not set mortgage rates, and the central bank’s decisions don’t move mortgages as directly as they do other products, such as. Instead, mortgage rates tend to move in lockstep with 10-year Treasury yields. Still, the Fed’s behavior set the overall tone for. Mortgage lenders and investors closely watch the central bank, and the mortgage market’s attempts to interpret the Fed’s actions affect how much you pay for your home loan. At the end of its March meeting, the Fed announced a one-quarter point increase in its federal funds rate, with more increases on the way in 2022. It was. The central bank had slashed rates to zero at the start of the pandemic. The November rate hike was the sixth of what could be seven bumps in 2022, says Clare Losey, assistant research economist at the Texas Real Estate Research Center at Texas A&M University. “Such increases diminish purchase affordability, making it even harder for lower-income and to purchase a home,” she says.

How much do mortgage rates affect housing demand

There’s no doubt that record-low mortgage rates helped fuel the housing boom of 2020 and 2021. Some think it was the single most important factor in pushing the residential real estate market into overdrive. Now that rates have , how will that affect home sales and prices? “Mortgage rates remain above 7 percent, which has caused refinance activity to effectively stop and home purchase activity to slow markedly,” says Mike Fratantoni, chief economist for the Mortgage Bankers Association. Not only have sales slowed, but of anywhere from a few percentage points to more than 20 percent. Yet, in the long term, home prices and home sales tend to be resilient to rising mortgage rates, housing economists say. That’s because individual life events that prompt a home purchase — the birth of a child, marriage, a job change — don’t always correspond conveniently with mortgage rate cycles. History bears this out. In the 1980s, mortgage rates soared as high as 18 percent, yet Americans still bought homes. In the 1990s, rates of 8 percent to 9 percent were common, and Americans continued snapping up homes. During the of 2004 to 2007, mortgage rates were higher than they are today — and prices soared. So the current slowdown may be more of an over-heated market’s rather than the signal of an . “The combination of elevated mortgage rates and steep home-price growth over the past few years has greatly reduced affordability,” says Fratantoni. “The volatility seen in mortgage rates should subside once inflation begins to slow and the peak rate for this hiking cycle comes into view.” For now, though, the housing market remains difficult for buyers.“The housing sector is the most sensitive to and experiences the most immediate impacts from the Federal Reserve’s interest rate policy changes,” says NAR Chief Economist Lawrence Yun. “The softness in home sales reflects this year’s escalating mortgage rates.” Yun says the average has jumped 28 percent over the past year, a bit of sticker shock that’s bound to reverberate through the housing economy. “I expect the pace of price appreciation to slow as demand cools and as supply improves somewhat due to more home construction,” he says. In fact, the National Association of Realtors (NAR) says the housing squeeze is already easing as demand declines. The rose to a 3.2-month supply in July and August, compared to a record-low 1.6-month supply in January.

Next steps for borrowers

Here are some tips for dealing with the climate of rising interest rates: Shop around for a mortgage. can help you find a better-than-average rate. With the refinance boom slowing, lenders are eager for your business. “Conducting an online search can save thousands of dollars by finding lenders offering a lower rate and more competitive fees,” McBride says. Be cautious about ARMs. are growing more tempting, but McBride says borrowers should steer clear. “Don’t fall into the trap of using an adjustable-rate mortgage as a crutch of affordability,” McBride says. “There is little in the way of up-front savings, an average of just one-half percentage point for the first five years, but the risk of higher rates in future years looms large. New adjustable mortgage products are structured to change every six months rather than every 12 months, which had previously been the norm.” Consider a HELOC. While is on the wane, many homeowners are turning to home equity lines of credit (HELOCs) for . SHARE: Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal. Troy Segal is Bankrate's Senior Homeownership Editor, focusing on everything from upkeep and maintenance to building equity and enhancing value.

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