Bankrate.com

Inflation is still running well above plan, and that means the Federal Reserve is keeping its finger firmly on the pause button. The central bank raised rates 11 times in 2022 and 2023, with the expectation that it would reverse course this year. But as inflation has stayed above 3%, it is standing pat. Following the Fed’s June 12 meeting, its fourth gathering of the year, Chair Jerome Powell held steady again, announcing no change in interest rates. The Fed also signaled that it’s likely to cut rates only once this year, down from its previous estimate of three cuts.

“Mortgage rates, which have remained higher for longer, will likely remain in the high 6s until later this year,” says Lisa Sturtevant, chief economist at Bright MLS, a large listing service in the mid-Atlantic region. “Some homebuyers who have been sidelined by affordability challenges are going to wait until rates come down to buy. Increasingly, home sellers may have to do more negotiating to attract offers.”

Housing market

Earlier in the inflationary cycle, the Fed had enacted increases of as much as three-quarters of a point. Now that inflation is down to 3.3% — still higher than its official target of 2%, but not terribly far off — that round of tightening appears to be over. However, until inflation drops down closer to that target, housing economists wonder when the anticipated rate cuts will begin.

“We still look for mortgage rates to drop to about 6.5% by the end of 2024,” says Mike Fratantoni, chief economist at the Mortgage Bankers Association.

In an effort to rein in inflation, the Fed boosted interest rates aggressively in 2022 and 2023, including a single jump of three-quarters of a percentage point. The hikes aimed 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.

Mortgage rates

The Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t move mortgages as directly as they do other products, such as savings accounts and CD rates. Instead, mortgage rates tend to move in lockstep with 10-year Treasury yields.

Still, the Fed’s policies do set the overall tone for mortgage rates. 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. The Fed bumped rates seven times in 2022, a year that saw mortgage rates jump from 3.4% in January all the way to 7.12% in October. In 2023, mortgage rates went higher still, briefly touching 8%.

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.

When mortgage rates surged higher than they had been in two decades, the housing market slowed dramatically. And, while sales volume remains slow, prices are high. The nationwide median existing-home price for April was $407,600, according to the National Association of Realtors — up 5.7% year-over-year and perilously close to NAR’s alltime-high median price of $413,800.

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.

“The combination of elevated mortgage rates and steep home-price growth over the past few years has greatly reduced affordability,” Fratantoni says.

Next steps

Here are some pro tips for dealing with elevated mortgage rates:

>> Shop around for a mortgage: Savvy shopping can help you find a betterthan-average rate. With the refinance boom considerably slowed, lenders are eager for your business.

>> Be cautious about ARMs: Adjustable-rate mortgages might look tempting, but Greg McBride, Bankrate’s chief financial analyst, says borrowers should steer clear. “Don’t fall into the trap of using an adjustable-rate mortgage as a crutch of affordability,” he says. “There is little in the way of upfront 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 home equity loan: While mortgage refinancing is on the wane, many homeowners are turning to home equity lines of credit — HELOCs — to tap into their home equity. The rationale is simple: If you need $50,000 for a kitchen renovation and you have a mortgage for $300,000 at 3%, you probably don’t want to take out a new loan at 7%. Better to keep the 3% rate on the mortgage and take a HELOC — even if it costs 10%.