The Federal Reserve is picking up the pace, voting on Wednesday to raise its key interest rate just three months after its last rate hike. The Fed announced that short-term interest rates will increase by one-quarter of a percentage point and suggested that two similar increases likely will occur later this year. Mortgage rates aren’t directly tied to the Fed’s short-term interest rates but tend to follow them.
Read more: Rising Rates, Rising Sales
“If you think it’s been hard so far to find a home that fits your budget and your needs, it’s going to get worse,” says Jonathan Smoke, realtor.com®’s chief economist. “There will be even fewer homes for sale” now.
Homeowners who already have lower mortgage rates locked in may have less incentive to trade up or buy a new home. Their increasing desire to stay put could continue to press already tight inventories of homes for-sale across the country.
As of Tuesday, the 30-year fixed-rate mortgage averaged 4.39 percent, according to Mortgage News Daily. Last summer, rates were near record lows of 3.44 percent.
In anticipation of the Fed’s move, the market has already seen mortgage rates increase more than a quarter of a percentage point over the past few weeks.
Home buyers likely will need to expect to pay about 3 percent more each month on their loans for a $250,000 home if they had a 20 percent down payment—or about $29 more per month or $348 more over the year, Smoke notes.
“The small changes we’re seeing shouldn’t price too many people out” of homeownership, Smoke says. “But if you keep adding it on, it will price people out.”
The Fed has raised rates only twice in the past decade. But Wednesday’s decision to raise rates again, just three months after the last increase, does signal a quicker pace for the year. The Federal Reserve voted in December 2016 to increase rates by one-quarter of a percentage point.
“Rising inflation will predominantly dictate the next monetary policy decision, but another short-term rate hike should be expected by the end of the summer,” Lawrence Yun, the chief economist of the National Association of REALTORS®, notes at the association’s Economists’ Outlook blog. “Right now, rents and housing costs are increasing faster than other components because of the stubborn housing shortages in much of the U.S. To contain inflation and slow the pace of future rate hikes, more home construction is needed now.”
Source: “How the Fed’s Latest Move Is Expected to Hurt Buyers,” realtor.com® (March 15, 2017) and “Fed Quickens Pace, Raises Rate 3 Months After Last Hike,” RISMedia (March 15, 2017)