The Fed Just Raised Interest Rates Again—Here’s Why That’s Bad News for Both Homebuyers and Sellers

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The Federal Reserve’s latest rate hike may be like a late frost creeping over the fragile spring housing market.

In the wake of the Fed increasing its rates by 0.25% on Wednesday afternoon, mortgage interest rates are expected to rise again. That’s going to hurt buyers grappling with still-high home prices, mortgage rates that are already nearing 7%, and a lack of properties for sale. Sellers will also share in the pain as there will be fewer buyers who can afford to jump into the fray and pay top dollar for their homes.

The housing market had begun to thaw as mortgage rates had temporarily fallen to the low 6% range. But this expected rate increase could halt the momentum that had been building.

“With home prices and mortgage rates already pushing the edge of the envelope for many shoppers’ budgets, it’s not surprising to see homebuyers respond when rates fluctuate,” says Realtor.com® Chief Economist Danielle Hale. “When rates rise, we see signs that buyers are pulling back, but when rates drop, homebuyers seem to jump back in the market.”

The Fed has been raising its rates to tamp down on high inflation, which includes the sticker shock from grocery shoppers paying more than $5 for a dozen eggs and renters who have been contending with double-digit rent hikes. While mortgage rates are separate from the Fed’s short-term interest rate, they have been moving in the same direction: up.

Mortgage rates had ticked up nationally to 6.7% by Wednesday afternoon in anticipation of the Fed’s increase, according to Mortgage News Daily. This was for 30-year, fixed-rate loans.

Even small fluctuations in these figures can add up to big costs for homebuyers. A buyer who can borrow $375,000 at a 6% mortgage interest rate may be only able to get a loan for $338,000 at 7%. As a result, their monthly payments swell in size.

Mortgage applications had just begun to tick up before the Fed news: Applications from homebuyers rose 17.5% in the week ending March 17 compared to four weeks earlier, according to the Mortgage Bankers Association. (However, applications were still down 36% from last year when the market was nearing its peak.)

Sales of existing homes also surged, rising 14.5% in February from January. Some of this was seasonal; sales are generally slow in the dead of winter following the holidays, and pick up in the spring when buyers generally come out in full force. Annually, sales were down 22.4% from a year ago.

“We are probably going see a pick up in sales as folks go out and look at homes, absent more banking crises and absent rates skyrocketing,” says Keith Gumbinger, a vice president at HSH.com, a mortgage information website.

He believes prices could even rise a little this spring as the competition for homes heats up.

“[But] I don’t think we’re going to be competitive with last year’s numbers,” he says.

While it’s probably little comfort to struggling buyers or sellers who had been hoping for a respite, the Fed’s rate hike was originally expected to be even higher after the sudden collapses of Silicon Valley Bank and Signature Bank. That could have had a bigger impact on mortgage rates.

And if the Fed hadn’t raised rates this month, it would have raised alarms that it was worried about the health of the U.S. banking system. That could have set off other economic problems.

“The Fed wants to be able to show that it is sensitive to inflation risks, but at the same time it’s recognizing the stresses in the banking climate right now,” Gumbinger says.

The upside is that the Fed increase could help tame inflation quicker, “which would mean lower mortgage rates in the long run,” says Realtor.com’s Hale.

But getting to this point may not be possible without a recession. And if job losses begin to mount, that could scare away potential homebuyers.

“The long-term outlook for housing is better if the Fed controls inflation,” says Aaron Brown, a Bloomberg columnist and adjunct finance professor at New York University. However, “we’re not through with the pain yet.”

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