Mortgage rates are not directly linked to the federal funds rate. Instead, they track the yield on 10-year Treasuries, which is influenced by factors including investor reactions to the Fed’s moves and inflation.
“The Fed raising short-term rates and signaling further increases means mortgage rates should continue to rise throughout the year,” said Sam Khater, chief economist at Freddy Mac.
High inflation and uncertainty in Ukraine also affect rates.
“Inflation is unlikely to slow any time soon,” said George Ratio, director of economic research at Realtor.com. “Investors are reacting to the escalating war in Ukraine and expect renewed supply chain disruptions to add additional pressure on consumer prices.”
He said all of these factors will continue to drive mortgage rates higher in the coming months. This means that one of the main drivers of home sales over the past two years – very low mortgage rates – is starting to dry up.
“Record low mortgage rates have helped many first-time buyers expand their budgets in 2020 and 2021,” Ratio said. “The lower rates have also enabled homeowners to reduce their monthly mortgage payments through refinancing. However, the days of interest rates below 3% are badly behind us, and we still have to solve the market fundamentals of supply and demand.”
But the cost of home ownership is rising. Not only are home prices up, but, at today’s rates, a median-priced home buyer’s monthly mortgage will be $340 higher than it was a year ago, adding more than $4,000 to their annual burden, according to Ratiu.
But he said higher rates may also reduce competition in the housing market.
“With rising mortgage rates and inflation putting pressure on the pool of buyers, we expect to see home prices moderate,” Ratio said.