Today the Fed increased their Fed Funds rate by .75 percent.  While on the surface that doesn’t seem like too big a bump, this is the largest single-day increase to the Fed funds rate since 1994, signaling a serious attempt at Fed members to reign in inflation.  The move comes on the heels of last weeks surprisingly high inflation report which shook up the markets and led to losses in equities markets and steep and fast increases to mortgage rates.

There is often a lot of confusion around the Fed Rate Hike and how it actually affects the mortgage market, so we hope to clear up some of the common misconceptions.

1. No, mortgage rates do not go up when the Fed Rate Hike happens

Mortgage rates are influenced by many things, but one of the biggest factors in the percentage rate offered to mortgage applicants is inflation.  When inflation is high (as it has been for all of 2022 thus far), mortgage rates are higher.  When inflation is reduced, mortgage rates usually come down with it.  Since the Fed rate hike is intended to reduce inflation, the result is often reduced mortgage interest rates, though sometimes it takes time for rates to come down a noticeable amount.  Today, however, the mortgage bond markets gained huge ground upon the Fed rate hike announcement and commentary, so improvements in rates were felt almost immediately for mortgage applicants.

2. Other debts will get more expensive, immediately.

The “prime rate” is tied directly to the Fed funds rate, and many of the most common types of debt are tied to prime.  Credit cards and home equity lines of credit are two of the most common debt vehicles that do go up and down based on the Fed movements, so with the latest Fed rate hike, it can be expected that credit cards and home equity line of credit rates will see an identical .75 percent increase in their cost.  Since more fed rate hikes are expected throughout 2022 as the Fed continues to fight inflation, it can be expected that this revolving debt will continue to get more expensive on a monthly basis for anyone carrying this type of debt.

3.  Does a Fed rate hike mean recession?

Recession has been a hot headline recently, and for good reason.  Many economic indicators currently point toward the US being in or heading toward a recession, however Fed rate hikes don’t necessarily mean recession.  It’s important to note though, that rate hikes usually lead into recession.  The reason is that higher rates cool off a hot economy by making borrowing more expensive.  When borrowing is more expensive, there tends to be a ripple effect in the economy that often hits the job market (leading to increases in unemployment), and slows inflation, cooling the GDP and often leading into consecutive quarters of negative economic growth, which is the technical indicator of recession.  Since we don’t know we’re in recession until we have 2 consecutive quarters of negative GDP, it’s impossible to say if we’re in a recession or will be soon, but it’s likely the Fed rate hike (and subsequent rate hikes) could point toward recession sooner than later.

4.  Does the Fed rate hike impact other rates and payments?

Through the same ripple effect, the Fed’s actions indirectly affect many aspects of the economy, but what the Fed funds rate actually is, is nothing more than the rate banks borrow from each other and from the Fed.  When banks are borrowing for free or nearly free, as we’ve seen over the past several years, it allows them to offer lower rates and still profit.  When their borrowing costs go up, to maintain the same margins of profit, the rates they offer consumers also have to increase, which is why borrowing becomes more expensive almost across the board.  Mortgage rates are somewhat of an exception because of the impact Fed rate hikes have on inflation that we noted above.

5.  How low will mortgage rates go?

No one has a crystal ball when it comes to mortgage rates, but historically in times of a Fed rate hike, and moreso in times of recession, interest rates decline.  2022 has brought some of the steepest increases we’ve ever seen in terms of how quickly rates have risen, and it remains to be seen if a decline could be just as steep, especially considering the weird market conditions related to COVID-19 that brought us the historically low rates of 2020 and 2021.  If you’re considering applying for a loan, your best bet is to talk with a MasonMac loan officer to determine which options are presently available, and what type of loan product and rate best fits your financial needs!

The post What the Fed Rate Hike Means for You appeared first on Mason-McDuffie Mortgage Corporation.

So let’s look at an example.  In 2006, we’ll take a home worth $300,000.

Price: $300,000
Rate: 6%
Monthly Payment: $1,800

Household income: $6,000/month
% of monthly income that goes to the mortgage payment: 30% 

Now let’s look at that same home in 2021

Price: $423,000 (up 41%)
Rate: 3%
Monthly payment: $1,783

Household income: $9,300 (up on average 55% since 2006)
% of monthly income that goes to the mortgage payment: 19%
These are the averages nationwide, and of course numbers will be different for every person, situation, and things vary by region, but on average, the market is about 11% more affordable today than it was in 2006.

Further, housing still has room to go – with supply lagging far behind demand and a generation of first time buyers coming of age, nearly all forecasts point to further home appreciation.  Add in supply-chain issues, inflation, and many other metrics and signs point to affordable housing being a very realistic thing.  That means today is a great time to buy, despite steep competition and high price tags.  To see what options you have in your area, you can contact your MasonMac loan officer, or contact us with questions by asking an expert here!

The post Is Affordable Housing Still Possible? appeared first on Mason-McDuffie Mortgage Corporation.

It’s come up a lot recently.  With unemployment at or near all time lows, a stock market rally that’s defied all odds for longer than history says it should have, and the Fed looking at potentially reversing monetary policy, it looks like our next recession is more a matter of when, not if.  With the most recent recession being the “Great Recession” that caused so many people to lose their homes, retirements, and so much more, many people are understandably frightened by the prospect of another recession.  In some cases, that fear is well founded.  Housing, though, isn’t an area that appears particularly vulnerable.

One thing many people remember from the last recession is how quickly and how far home values fell.  “For Sale” signs littering neighborhoods, short sales, and foreclosures are still fresh in the minds of many, but if we look at the data, this time is different.  And while many aspects of what causes a recession are complicated, and global economics isn’t always easy to understand, one major factor in housing is very easy to comprehend – the idea of supply and demand.

Supply and demand laws state that when there’s a high supply, and not enough demand, prices go down.   And when there’s high demand and low supply, prices go up.  Well, let’s look at supply and demand in terms of housing, first with supply:

Supply is below demand levels in the current housing market

As you can see, current supply levels are far below where they were in 2008, when values began to crash.  But what about demand?  Well, let’s take a look at one of the biggest drivers of demand – household formations:

Housing completions aren’t keeping up with household formations – a good sign for home values

Household formations are a strong indicator of demand for housing, and as you can see in this graphic, annual home completions aren’t keeping up with household formations (due to many factors), and if you look back to the last recession, you can see the opposite was true – the supply of homes far outweighed the formation of households to fill those homes up.

The chicken or the egg?

BUT, you may say, you can’t escape the fact that there was a recession, and that during that recession, home values fell substantially!  And you’d be correct – but which came first.  If you look at the data, the housing bubble started to collapse, and actually caused the recession.  It was a housing bubble that caused a recession, and not a recession that caused problems with home values.  Today’s market IS different – we have a high demand for housing, and not a lot of supply, which means even in a recession, home values should be in relatively good shape (as they have been historically through recessions).

2008-2012 was a bubble collapsing, there’s no doubt.  But those who think the market today is similar aren’t looking at data. The data suggests that home values will continue to hold strong, and forecasts are calling for home appreciation to continue.  Historically, buying a home has been one of the biggest pieces to the puzzle of wealth building, and today that still rings true.  Want proof?  Ask a MasonMac loan officer to share data with you on your local market.  Real estate is local, but in the majority of markets, you’ll see supply is lagging behind demand, and buying is a smarter financial move than renting, especially long term, but in some cases, short term as well.

Recessions aren’t fun.  They cause problems for a lot of families, industries, and communities.  While we don’t want to diminish the fact that people could see some financial struggles, we do want to make it clear that yes, in fact, this time is different.  While the Great Recession crushed housing, going forward, housing looks to be one of the strongest areas of our country’s economy, and it doesn’t look like that trend will be ending any time soon.

The post What Would a Recession Mean for Housing? appeared first on Mason-McDuffie Mortgage Corporation.