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Mortgage rates are unlikely to drop in August

(NerdWallet) – Mortgage rates will likely rise in August as the Federal Reserve continues to hike interest rates.

Fed Chairman Jerome Powell has repeatedly said that the central bank’s “top priority” right now is to slow inflation. The Fed curbs inflation by raising short-term interest rates. When the central bank pushes short-term rates up, mortgage rates usually go up as well.

In fact, the Fed specifically targeted mortgage rates. At the height of the pandemic, the central bank bought government and mortgage debt, pushing mortgage rates to record highs. Now the Fed is gradually reducing these debt holdings, which should force rates higher.

This so-called Fed balance sheet reduction is just beginning. As Powell pointed out at a press conference on July 27 after the Fed’s latest rate hike, the shedding of these assets continues to accelerate and will “reach full force” in September. As that date approaches, mortgage rates will come under additional upward pressure.

Affordability in balance

Home prices have risen rapidly along with mortgage rates, a combination that is demoralizing buyers because homes are becoming less affordable. Look at what happened to affordability from January to June. When you take the median resale price of a home and the average mortgage rate over the two months, the monthly payment for a typical home purchased in June was $774 higher than its counterpart in January (after a down payment 5%).

If there’s any good news for homebuyers, it’s that prices aren’t going up as fast as they used to. In June, the median resale price of an existing home was 13.4% higher than a year earlier, while in February the year-over-year price increase was 17.1 %. Rising mortgage rates contributed to the slowdown in prices.

Rising mortgage rates had an even deeper impact on the median price of new homes, which rose 7.4% in the 12 months to June, according to the US Census Bureau. As recently as April and May, year-over-year price increases had exceeded 20%. Once again, the Fed’s rate hike campaign has changed the pace of house price increases.

The Fed is determined

Ultimately, home prices continue to rise, making it difficult for potential buyers to find homes they can afford. But it’s hard to argue that the Federal Reserve is succeeding in slowing runaway house prices. Finally, in a roundabout way, the slowdown in house prices will be reflected in the overall inflation rate.

Does the Fed have to provoke a recession to chop the inflation rate to its target of 2%? Powell danced around that question during his July 27 press conference. He said he is not the person who defines the start and end of a recession, and he added: “Our goal is to bring inflation down and have a so-called soft landing. , that is, a landing that does not require … a really significant increase in unemployment.

But he has also hinted that he is prepared to restrain the US economy, including the strength of the labor market, if that is what is necessary to bring inflation under control. If and when the Fed succeeds in reducing the inflation rate to 2%, mortgage rates could fall because mortgage rates meet inflation expectations.

what happened in july

The average 30-year fixed mortgage rate fell slightly in July after rising for seven consecutive months. It averaged 5.66% in June and 5.55% in July.

In my July forecast, I predicted that mortgage rates would rise, driven by high inflation and the Fed’s efforts to control it. (This is the same reasoning behind August’s forecast of a mortgage rate hike.) But investors positioned themselves for a recession by buying bonds, which had the indirect effect of driving down prices. mortgage rates. I guessed correctly in eight of the last 12 months.


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