Table of Contents Executive Summary 2 Introduction 3 The Federal Interest Rate 3 Mortgage Rates 4 Result of Rate Increase on the Housing Market 5 Future Outlook 6 Works Cited 7
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“Inflation, Recession, Unemployment, Depression, Interest.” These are all words that Americans have become very familiar with in the past few years. Due to the Coronavirus pandemic, many economic changes have occurred. These ebbs and flows are known as the Business Cycle and are normal in a large economy and represent growth over time. The Federal government has built-in systems to get the economy going in times of recession and to slow down spending in times of inflation. The overall goal is to move the economy into equilibrium. One of the built-in systems to assist with reaching equilibrium is the Federal Interest Rate.
The United States is currently facing the highest Federal Interest Rate since 2007. As of November 2nd, 2022, the Federal Rate is between 3.75-4% after an increase of 75 points (Lewis). The Fed has been raising the rate steadily since the beginning of 2022 in hopes of combatting inflation. However, if the Fed raises rates too high and too quickly, it could cool demand so much that the economy tips into a recession. Higher interest rates make debt costlier and borrowing harder — for both consumers and businesses (Gailey). All of this comes after they lowered the rate to near zero in 2020 to stimulate the economy after the immediate effects of COVID and did not raise or lower it at all in 2021, all of which is illustrated in the chart below.
As you can see, in early 2020, the rate lowered to near zero and then stayed that way until March 2022 when it began to increase at intervals, leading up to the current rate near 4%.
So far this year, there have been six significant increases to the Federal Interest Rate. On 3/17, the rate increased by 25 points, then by 50 points on 5/5, then beginning in June, the rate increased by 75 points each time on four different dates since. Making a total increase of over 300 points in less than three quarters (FederalReserve.Gov).
One of the areas of the economy which has been affected largely due to the changes in the Federal Interest Rate is the housing sector. The housing market is the most interest-rate-sensitive segment of the economy, and the impact rates have on homebuyers continues to evolve. Home sales have declined significantly and, as we approach year-end, they are not expected to improve (FreddieMac.com).
Mortgage rates fluctuate daily and sometimes rise in anticipation of a Federal Rate hike. Below is a visual representation of the changes in mortgage rates from 2020 to the present. As the illustration shows, the rates did not change much in 2021, only slowly decreasing. However, throughout 2022, the rates have continued to rise, up to the current rates, between 6 and 7%.
As illustrated by both graphs, mortgage and federal interest rates generally move in the same direction. The increasing mortgage rates have caused homes to become less affordable for most, and even unaffordable for some. This is because an increase in the mortgage rate causes the amount of income required to qualify for a home loan to increase as well. As the income required to qualify for a loan increases, the maximum home price affordable to that household decreases (Losey). The rise in prices has caused a significant decrease in the number of home sales. According to an article by the Texas A&M Texas Real Estate Research Center, home sales in September of this year were down 15.5% from the previous year. To combat doubling mortgage rates, Texas home prices are going to need to significantly decrease to maintain affordability (Roberson, Yan and Shaunfield).
What does this mean for the future? The federal government is expected to make another increase to the Federal Interest Rate before year-end. Many experts predict the bank’s benchmark federal funds rate will continue to rise throughout the year until inflation recovers (Gailey). Until the economy can stabilize and move back into equilibrium, home sales will likely continue to decrease as inflation decreases, and until the Federal Interest Rate levels out, mortgage rates will continue to increase as well.
If you are in the market for a home or looking to borrow from the bank, now is not the time. Home prices are beginning to lower to entice buyers into borrowing. However, you would not be saving in the long run due to the increased interest rates. If possible, it would be best to put home buying and borrowing of large sums off until the economy stabilizes, and the interest rates drop.
Works Cited *FederalReserve.Gov. 2 November 2022. Document. 14 November 2022. *FreddieMac.com. 10 November 2022. 14 November 2022. Gailey, Alex. Time.com. 2 November 2022. Article. 14 November 2022. Healy, M. “Chapter 9 Business Cycles, Unemployment, & Inflation.” www2.harpercollege.edu. Palatine, 2022. Webpage. 14 November 2022. Lewis, Holden. Nerdwallet.com. 2 November 2022. Article. 14 November 2022. Losey, C. “How Higher Interest Rates Affect Homebuying.” Texas A&M University Texas Real Estate Research Center (2022): 5. Publication 2339. Roberson, Joshua, Weiling Yan and John Shaunfield. Texas Housing Insight. 7 November 2022. Recenter.Tamu.Edu. 14 November 2022. *Denotes primary source
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