Last week, the Federal Reserve opted to meet without raising the federal funds interest rate. This marks only the second time in 19 months that they did not raise the rate. With this said, they were particularly clear when stating that they intend to raise rates again later this year. As of now, the plan is also to keep interest rates at a higher level for the foreseeable future as well. Of course, the likely potential for higher mortgage rates is not welcomed news for a housing market and an overall economy that has shown signs of weaknesses already. According to the Fed Chairman, Jerome Powell, “What we decided was to maintain the policy rate and await further data.”
How will the rising key interest rate impact mortgage rates?
Mortgage rates are typically pegged to the 10-year Treasury yield. The 10-year Treasury yield is the interest rate that the US government pays to borrow money for 10 years. When the 10-year Treasury yield rises, mortgage rates tend to follow suit. As the Fed raises interest rates, the 10-year Treasury yield is expected to rise as well. This will push mortgage rates higher.
Needless to say, rising mortgage rates will make it more expensive to buy a home. For example, if a borrower is looking to buy a $300,000 home with a 20% down payment, they would need to borrow $240,000. At a 6% interest rate, their monthly mortgage payment would be $1,367. But if interest rates rise to 7%, their monthly payment would increase to $1,506. That’s a difference of $139 per month, or $1,668 per year. This could make it difficult for some borrowers to afford a home.
As of now, the median projection for where the federal funds rate will be at the end of next year is 5.1%. This is up from the prior median projection of 4.6% given in June. Many real estate economists have been calling for an end to the rate hikes given the precarious situation for the housing market. Nonetheless, this does not appear to be the case. Fortunately, the housing market has been resilient. In South Florida particularly, we continue to see a steady demand for housing given the constant influx of people moving to our area.
Are you looking to buy or sell real estate in South Florida? We can help! Contact Natasha at Live South Florida Realty, Inc. today! Also, don’t forget to download the free Florida Home Search app for your mobile device.