April 1, 2023

It’s bad enough that Southern California home prices remain high despite cooling demand, averaging almost seven times the state’s median income for a family of four.

Worse, however, was the rapid rise in mortgage rates. The rate on a 30-year fixed-rate mortgage doubled in nine months to 6 percent last week for the first time since George W. Bush was president.

This is not only painful for people trying to borrow money to buy a home, but also for homeowners with adjustable-rate mortgages whose monthly payments increase year-over-year as interest rates rise.

Two factors that have increased are inflation and the Fed’s Board of Governors efforts to control it. The Fed has raised the short-term “federal funds” rate (the interest banks charge each other for overnight loans) four times this year and is expected to hike again on Wednesday.

A key factor in mortgage rates is how much inflation lenders expect to see over the life of the loan, said David Wilcox, senior economist at the Peterson Institute for International Economics and Bloomberg Economics. Financial markets expect a higher rate trajectory over the next few years than earlier in 2022, given the Fed’s message and persistent inflationary pressures in the economy.

So, should you expect to pay more for a new mortgage after the Fed’s latest rate hike? Possibly, but there is no simple cause and effect here. Instead, the Fed’s actions indirectly affect mortgage rates by influencing the expectations of lenders and financial markets.

Consider what happened after the Fed raised its target rate by 0.75 percentage points in June, the largest increase ever since 1980: mortgage interest rates fall. They started climbing again a few weeks later in anticipation of the Fed meeting in July, when the Fed raised its target by 0.75 percentage points for the second time. After that, mortgage rates fell again.

This illustrates how financial markets are running ahead of the Fed, reacting to expectations rather than waiting for central bank action.When the Fed hits those expectations, “you typically see some sort of relief rebound,” said Robert Heck, vice president of U.S. mortgage lending. Mortyan online mortgage broker.

The Fed is trying to break the economy’s inflationary fever without pushing the country into recession, but the usual measures of economic health are chaotic.GDP is falling, but unemployment remains low; corporate profits are basically solid; Consumer confidence is returning; and consumer spending continue to growalbeit very slowly.

Federal Reserve Chairman Jerome H. Powell has repeatedly said the central bank will raise interest rates until inflation is under control. Still, some lenders and investors took a look at the economy in July and thought the Fed would ease the monetary brakes, Heck said.

That changed, however, in August, when Powell and other Fed officials reiterated their resolve as Powell put it on august 26“Hold on until we have the confidence to get the job done.” Whether intentional or not, the statement echoes Memoirs of Former Federal Reserve Chairman Paul Volckerhe used high interest rates to lead the US out of double-digit inflation in the 1980s.

“I think the Fed has succeeded in communicating more clearly and the markets have demonstrated their determination to fight inflation and win this battle more, more thoroughly,” Wilcox said.

Meanwhile, Wilcox said, “the market has concluded that the Fed is going to have to do more to win this battle.”

He said recent data showed inflation was broader and more stubborn than previously thought, and the labor market continued to be “exceptionally strong.”

Heck said any newly released economic data also did not point to lower interest rates.

As a result, mortgage rates have risen steadily since early August.

Another reason for the hike, Heck said, was speculation that the Fed could raise the federal funds rate by an even bigger percentage — 1 to 1.25 percentage points — on Wednesday. “I do think this meeting is probably the least prepared for us, in terms of knowing what to expect,” Heck said.

A key to the market’s reaction will be “dot plot,” or a graph showing how much Fed officials expect the federal funds rate to increase or decrease over the next few years. Powell has said he expects the federal funds rate to hit 3.4% by the end of the year — at 2.25% at Wednesday’s meeting to the range of 2.5%.

Another important consideration will be what Fed officials think about the mortgage-backed securities held by the central bank, Heck said. Earlier this year, the Fed announced it would cut its holdings by about $35 billion a month starting this month. If it decides to cut its holdings further, that would reduce demand for mortgage-backed securities, which, according to the internal logic of credit markets, would lead to higher interest rates.

About the Times Utilities News Team

This article is from The Times Utilities News Team. Our mission is to make a difference to the lives of Southern Californians by publishing information that solves problems, answers questions, and aids decision-making. We serve audiences in and around Los Angeles—including current New York Times subscribers and diverse communities whose needs our coverage has historically failed to meet.

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