How the Fed’s Latest Move Is Expected to Hurt Home Buyers

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The Federal Reserve just announced some bad news for aspiring homeowners counting their pennies: It’s going to continue to nudge up a key interest rate this year. Yes, after a stop-and-start approach to raising  rates over the past couple of years, it looks like we’re settling in for an upward ride—making new buyers’ monthly mortgage payments a bit more expensive and worsening the existing housing crunch.

The Fed announced on Wednesday that short-term interest rates would go up 0.25% and signaled that two similar increases are on the horizon for later this year.

Mortgage rates aren’t the same as short-term interest rates, which the Fed determines, but they tend to keep a parallel relationship and even anticipate the Fed’s actions. So the Fed’s actions can still have a big impact on the housing market.

“If you think it’s been hard so far to find a home that fits your budget and your needs, it’s going to get worse,” says Chief Economist Jonathan Smoke of realtor.com®.

That’s because homeowners who already have lower mortgage rates locked in are less likely to trade up or down into new homes that require them to get more expensive loans. So they’ll stay put.

“It’s bad for the market, because that means there will be even fewer homes for sale,” Smoke says.

Interest rates were 4.39% on the average 30-year fixed-rate mortgage as of Tuesday, according to Mortgage News Daily. That’s up from near historic lows of 3.44% last summer.

And that means buyers will be shelling out about 3% more each month on their loans for a $250,000 home that they plunked 20% down on. That’s because in anticipation of the Fed hike, mortgage rates have already ticked up just more than a quarter of a percentage point over the past few weeks. In dollars and cents, borrowers would fork over an additional $29 a month, or $348 a year.

“The small changes we’re seeing shouldn’t price too many people out” of homeownership, Smoke says. “But if you keep adding it on, it will price people out.”

The housing crunch will continue to pressure home builders to, well, build more abodes. But new homes are typically more expensive than older residences as land, local regulation, labor, and materials costs are high and rising in most parts of the country.

“Right now, rents and housing costs are increasing faster than other components [of the economy] because of the stubborn housing shortages in much of the U.S.,” Lawrence Yun, chief economist of the National Association of Realtors®, said in a statement. “More home construction is needed now.”

But buyers shouldn’t panic. Those hoping to save a few bucks can opt for adjustable-rate mortgages, which generally cost a bit less upfront than 30-year fixed-rate loans, he says. They can refinance those loans later if rates fall. Or they can purchase smaller residences in less expensive neighborhoods.

And even with the bump, “rates are still incredibly low,” says Smoke. Over the past 46 years, they’ve been at an average 8.25%. That’s almost twice what it is today.

Mortgage rates have been climbing since the presidential election. In December the Fed announced that it would be raising short-term interest rates a quarter of a percentage point, just the second increase since the housing bust.

This time around, the Fed is raising rates to “prevent inflation from getting out of control,” says Smoke. He adds that a rate hike is a good sign that wages and employment across the country are also up.

“They want to make sure the economy doesn’t overheat.”

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