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The Fed’s rate hike means ‘mortgage rates are going to continue to rise’: Economist

Mortgage rates have been steadily rising over the past year, and with the Federal Reserve’s latest rate hike, there likely won’t be a slowdown any time soon, according to one economist.

The rise in interest rates “means that mortgage rates are going to continue to rise and that we’re going to see some pullback in the housing market,” Dana Peterson, chief economist at The Conference Board, said on Yahoo Finance Live (video above). “And that’s a function of, yes, very elevated prices that’s affecting affordability, but also rising interest rates.”

The Fed raised interest rates by 75 basis points on Wednesday, and the central bank stated that it “anticipates that ongoing increases in the target range will be appropriate.”

Mortgage rates, meanwhile, are at 5.4%, according to Freddie Mac, which is more than two percentage points higher than they were at the start of 2022.

The Fed sets the rates that banks use to borrow money from the central bank. As the Fed’s interest rates move higher, it directly influences mortgage rates since lenders tend to also raise interest payments on loans for home buyers.

Fannie Mae’s Home Purchase Sentiment Index dipped to 64.8 for the month of June, which is its second-lowest reading in a decade. According to the survey, only 20% of consumers think it’s a good time to buy a home right now.

“When we look at our own confidence measures, people are saying that they’re pulling back on their expectations for home buying,” Peterson said.

What the Fed’s next move might mean

For home buyers, higher interest rates typically decrease their purchasing power.

Pending home sales — homes under contract to be sold — is a leading indicator of the health of the housing market. That number plunged 20% last month versus June 2021.

Existing homeowners with fixed-rate mortgages won’t feel the same impact as buyers and sellers unless they are considering selling their homes in the near future. Homeowners with adjustable mortgage rates, however, will see their interest payments increase moving forward.

According to Peterson, that’s exactly what the Fed wants to see amid the current inflationary environment: A “calming in domestic demand,” with housing being a big component of it.

Demand for homes ramped up over the past two years. During the height of the coronavirus pandemic, interest rates fell to historic lows. At the same time, many home buyers moved out of big cities in favor of suburbs and smaller cities.

Scott Teel, a high school history teacher, carries a ‘for sale’ sign, as part of his second job as a real estate agent, in Moore, Oklahoma. (Photo: PAT CARTER/AFP via Getty Images)

“Then you have millennials,” Peterson said. “They’re all turning 40, and they have families, and they’re looking for that next upgrade in housing. All of those things are demand that the Fed wants to tamp down on.”

Peterson anticipates that the Fed isn’t yet done with hiking interest rates, stating that the central bank might even go into “restrictive territory,” which would be a rate above 3% and even close to 4% by early 2023.

“We think that action, that very aggressive stance against inflation, will actually induce a recession,” Peterson said, “probably starting an actual recession that the NBER would agree is one, probably starting in the fourth quarter of this year.”

Fed Chair Jerome Powell said the economy has not yet entered a recession during his most recent press conference Wednesday. “There’s just too many areas in the economy that are performing well,” Powell added.

Ethan is a writer for Yahoo Finance.

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