The Federal Reserve’s fight against inflation is hitting home. The housing market, that is.
Central bank officials launched a campaign on Wednesday to slow the torrid growth in consumer prices by gradually pushing up borrowing costs, including on mortgages. It’s unwelcome news for anyone looking to buy or sell a home, though there may be a silver lining — a slim one — down the road.
Steeper mortgage rates, of course, translate to higher monthly payments. That’s going to force some prospective buyers — especially first timers — out of the market. For others, it will mean taking a bigger financial risk — or perhaps settling for a smaller home or a less desirable location.
“There will be a squeeze on a segment of buyers,” said Melvin A. Vieira Jr., an agent with RE/MAX Destiny and president of the Greater Boston Association of Realtors.
Just how tight of a squeeze? That depends on how long it takes the Fed to wrangle inflation, the worst in four decades, back to more manageable levels.
Wednesday’s quarter percentage point increase in the benchmark federal funds rate, to a range of 0.25 percent to 0.5 percent, was the first by the Fed since 2018. But mortgage rates had already started to rise, as investors anticipated the widely telegraphed move, and as the central bank phased out its massive purchases of mortgage securities, which had been part of its strategy to keep the financial system flush during the pandemic.
After averaging just over 3 percent last year, the 30-year fixed mortgage rate hit 4.16 percent this week, mortgage buyer Freddie Mac said on Thursday. It’s the first time rates have topped 4 percent since May 2019.
The run-up — most of it just in the last few months — has tacked on about $360 to the monthly payment on a 30-year fixed loan used to finance a $750,000 home purchase with the standard 20 percent down-payment. That’s a 14 percent increase to $2,920 a month on what is a typical home price in the Boston market.
Fed officials see the funds rate rising to 1.9 percent by the end of the year, and up to 2.8 percent in 2023, which would the highest since 2008. That year, a 30-year fixed-rate mortgage averaged just more than 5 percent, but the economic landscape was completely different: The Fed was easing credit rapidly amid the Great Recession caused by the housing crash.
The last time the Fed tightened credit over an extended period was from the end of 2015 to July 2019, when it sought to normalize rates after dropping them to near zero during the 2008-2009 financial crisis. The federal funds rate rose to 2.5 percent. During that stretch, which also differs in significant ways from today, 30-year fixed rates climbed from about 4 percent to more than 5 percent in late 2018, before dropping back to 3.75 percent.
Mortgage rates are exceedingly tough to predict because they are influenced by many factors, not just the federal funds rate. Each Fed rate cycle is different, but given the central bank’s current trajectory, a 30-year fixed loan approaching 5 percent isn’t out of the question.
“Five percent is possible but [such a rapid increase] would be unprecedented,” said Taylor Marr, deputy chief economist at real estate brokerage firm Redfin.
Marr said that even with mortgage rates moving higher, home prices are more affordable than they were during the pre-crash years because incomes have grown. The National Association of Realtors affordability index, which tracks median family income against how much money is needed to buy the median-priced house, stands well above the levels of 2006, when buyers were maxed out.
“Home prices are at an all-time high,” Marr said. “But they are dramatically lower relative to income than they were during the boom.”
Still, affordability has been waning as home prices surge. In the Boston region, the median sales price — the midpoint between the highest and lowest prices — for a single-family home jumped 17 percent to $755,000 in February from a year earlier, according to the Greater Boston Association of Realtors. It’s impossible for incomes to keep up with that kind of appreciation.
Which is one reason why the Fed is pulling the plug on its easy-money policies. If higher rates sap demand among buyers, the growth in home prices will probably slow. There may be smaller crowds at open houses and less aggressive bidding wars.
Unfortunately, higher rates won’t address the biggest problem facing buyers: the dearth of homes on the market.
“We could see inventory staying on the market a little longer if demand pulls back,” said Nicole Bachaud, an economist at real estate website Zillow. “But we could also see some existing homeowners feeling locked into the low rates they got on their homes in the past, and therefore unwilling to sell, which would keep new inventory low in the near term.”
Until something breaks the supply logjam, buying a house around here will require a small fortune — and a lot of luck.