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Wednesday August 2, 2023

Mortgage rates remain a hot topic this summer and one of the key influencers affecting current and upcoming real estate market activity as a whole. We asked New American Funding for their insight on the month’s economic news and to unpack what it all means for agents, homebuyers and sellers.

The Fed met this week. What was the latest decision on interest rates?
Seeing inflation still above its 2% target, as expected, the Fed raised rates by .25 basis points. However, they have signaled this could be the last rate hike if inflation continues showing signs of improvement. Although we are seeing inflation beginning to curve, the true test will be if that downward trend holds. Wednesday’s rate hike was widely expected and was already baked into the market.

What does the latest move mean for mortgage rates?
There are many misconceptions as it relates to the Fed rate hikes. Most believe the rate hikes have a direct impact on mortgage rates, however, if you look at what the Fed is trying to accomplish, their goal is that by raising the federal funds rate, they will slow the economy and help lower inflation. Inflation is the arch-enemy of mortgage rates and if inflation is high, mortgage rates will be high. However, if the Fed can continue curbing inflation by hiking the federal funds rate, we should see mortgage rates come down. Additionally, as stated above, the market already priced in this week’s increase, so mortgage rates remained flat even after the Fed’s announcement.

What does this mean for buyers and sellers?
The Fed’s continued efforts to lower inflation are certainly celebratory news for both buyers and sellers. Lower cost of capital will result in more inventory as sellers who are locked into pandemic-era interest rates are more likely to make their next move. Buyers, who may have been priced out of the market due to higher interest rates, will return to the market to take advantage of the lower cost of capital.

Has the Fed signaled this would be the last hike or can we expect more?
After its 11th rate hike, we anticipate the Fed to increase the rate only one more time by .25 basis points in September, but some Fed officials have called for a long pause of rate hikes to first gather data to decide if any more are necessary. The Fed is likely to take a wait-and-see approach after this latest rate hike. We will all be keeping a watchful eye on unemployment numbers as a rise in unemployment will likely confirm inflation is truly in a downward trajectory which should result in lower mortgage interest rates.

What can we expect for the rest of the year and the start of 2024?
The Fed hopes to see inflation continue to fall, but the tight labor market is making it difficult for the Fed to be confident that the sticky inflation will fall to its target. With that in mind, Jerome Powell said the Fed “no longer forecasts a U.S. recession, and ‘we do have a shot’ for inflation to return to target without high levels of job losses.” While we have experienced a volatile rate market in this past year, the future seems to be more promising as the Fed looks to stop hiking rates.

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