Latest News on The Federal Funds Rate

Dated: May 6 2022

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As expected, the Federal Reserve raised the Fed Funds rate by 50 bps yesterday, which is exactly what the markets were expecting them to do. The Fed Funds rate does not directly impact mortgage rates. The Fed Funds rate directly affects credit card rates, auto loans, and home equity loans.

They acknowledged that inflation is a serious concern and is starting to affect consumer spending. The U.S. economy is not growing as Q1 of 2022 showed the economy contracted by a rate of 1.4% annually, instead of their initial estimate of growing by 1%. We want the economy to slow down as this will bring down consumer prices and bring about a more normal economy and housing market.

Housing markets in the U.S. will behave very differently over the coming months. Markets heavily dependent on tech jobs are likely to see a greater slowdown than suburbs with a more balanced job market. Tech housing markets like Seattle, San Francisco, Austin, and Denver will see slow home price growth as the NASDAQ is down more than 20% on the year. More than 50% of the companies in these markets lost money last year, and growth tech companies have started layoffs (Robinhood, Netflix, Better, etc). I expect these markets to see minor home price declines by the end of the year as venture capital funding for high-growth companies is slowing. Homes for sale in Salt Lake City, Seattle, Boston, Raleigh, Los Angeles, Boise, and Los Angeles have seen inventory levels increase by more than 20% from March to April. This means more homes for sale, fewer price wars, and likely slowing housing markets to a more NORMAL level.

Housing markets like Miami, San Diego/Riverside County, Orange County, Houston, Phoenix, Chicago, Scottsdale, Birmingham, Las Vegas, Memphis, Pittsburg, Sacramento, Fayetteville, and Virginia Beach will suffer from a serious shortage of homes for sale for likely several years to come. These markets did not build nearly enough homes for the jobs they created over the last 15 years. Comparatively, Austin and Nashville built 5 houses for every 100 jobs last year. At the same time, San Diego built less than 1 house for every 100 jobs in the economy. These markets will likely see 3% to 10% price appreciation over the next 12 months.

Summary:
With mortgage rates at 15-year highs, individuals are staying put in their homes, forcing new homebuyers to have even fewer options available. With over 60% of all mortgages at a 4% rate or less and 30% at less than a 3% rate, homeowners do not want to give up their low rate and payment. Mortgage payments have increased by 40% for the same home over the last 12 months. Now in markets like the ones mentioned above that have very limited new construction homes coming to market, we will continue to see stable home prices. However, in markets that have a lot of new construction homes in the pipeline, like Austin, Boise, and Raleigh, we will see higher rates and higher inventory slowly push home values lower.
Once the Federal Reserve gets inflation cut in half and the economy officially gets declared it's in a recession, we will see the Fed likely slowly reverse course. This will probably bring mortgage rates back down into the 4%s by early to mid next year. So for homeowners looking to buy in a strong market, I would look for the right home, deal with a slightly higher payment for 12 to 18 months, then refinance.

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Mike Metter

As a RE/MAX® agent, I’m dedicated to helping my clients find the home of their dreams. I strive to provide a professional and personal service ensuring that my client's best interests are al....

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