‘The Worst Is Over’ for Mortgage Rates Despite Another Fed Hike, Experts Say

An image of a for sale sign is used to illustrate an article about mortgage rates. Credit: Getty Images
The housing market has slowed down significantly thanks to a dramatic rise in mortgage rates this year. Rates have started to come down thanks to signs of cooling inflation.
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The Federal Reserve raised interest rates this week, but that doesn’t mean mortgage rates are going up.

During their December meeting, the Fed hiked its benchmark short-term interest rate, the federal funds rate, by 50 basis points. This comes after the Consumer Price Index was up 7.1% year-over-year in November, a softer than expected number.

“From a mortgage perspective, rates have actually gone down even though the Fed has raised rates. We would expect the worst is over. We think you’re going to see lower rates into the next year despite further rate hikes,” says JR Gondeck, partner and managing director with the Lerner Group, a financial advisory firm.

Experts say the next moves for mortgage interest rates depend more on the tone of the Fed’s projections for 2023, which signaled additional rate hikes to come in the year.

Ahead of the Fed’s December meeting, mortgage interest rates receded week-over-week. The average for a 30-year fixed-rate mortgage is now back down to 6.51%, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures.

“I think a lot of the Fed’s actions have already been baked into mortgage rates. With that said, if the Fed takes a more hawkish tone than market’s anticipate, we could see some upward movement in mortgage rates,” says Odeta Kushi, deputy chief economist at First American Financial Corporation.

Amid their ongoing bid to tame inflation, housing costs, which make up a significant portion of consumer spending, are an important metric for the Fed.

Chairman Powell said, in a recent speech, “We are seeing the effects on demand in the most interest rate sensitive sectors of the economy, such as housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”

This Week’s Mortgage Rates

Mortgage rates continued their decline this week, with the average rate for a 30-year fixed-rate loan dropping to 6.51% in a survey by Bankrate, which like NextAdvisor is owned by Red Ventures. The 30-year average ticked down just a hair in a similar survey by the government-sponsored entity Freddie Mac, to 6.31%.

Here are the weekly averages for several loans as of Dec. 14, according to Bankrate:

Loan TypeThis Week’s RateLast Week’s RateChange
30-year fixed6.51%6.62%– 0.11
15-year fixed5.68%5.81%– 0.13
5/1 adjustable5.43%5.46%– 0.03

After years of low rates, averages earlier this fall hit levels not seen in two decades, as this chart of monthly averages according to Freddie Mac shows:

How the Fed Affects Mortgage Rates

Mortgage rates aren’t directly correlated to the Fed’s actions. However, they both respond to inflation. 

When you take out a mortgage, it’s sold to investors on the bond market in a bundle of other mortgages, known as a mortgage-backed security. With inflation and the rising cost of borrowing money, lenders have had to raise mortgage rates substantially in order to offer a better return to investors interested in mortgage-backed securities. 

After inflation came in cooler than expected in November, mortgage rates dipped as the bond market rallied. The Consumer Price Index for November indicates that the highest inflation in 40 years is waning a bit. This a good sign, not only for the Fed, but for mortgage rates as well.

However, experts say the Fed is wary of caving to market expectations too soon and having inflation rears its head again.

“They want to talk tough toward the tone of inflation and keep expectations set going forward, even though the reality is a lot of inflation is backward looking at this point,” Gondeck says. “So, we expect the Fed to raise rates by half a percent but to keep a very tough tone toward keeping rates higher ahead.”

If the Fed can slow housing cost growth, it’s likely there will be a multiplying effect on the rest of the economy. 

What Is the Federal Reserve Doing?

Since the start of 2022, the Fed has raised its federal funds rate from zero to 4.75% – one of the fastest rate hikes ever seen from the central bank. It’s all been in the name of taming inflation. 

“Inflation is, essentially, too much money chasing too few goods,” says Denis Poljak, co-founder of Poljak Group Wealth Management. 

By raising rates, the Fed is making borrowing money more cost-prohibitive. Until they see a sustained downturn in consumer spending, and thus inflation, the Fed has stated they will continue with their rate hiking regime. 

Today’s inflationary environment didn’t happen overnight. It’s been gaining traction since the start of the pandemic, and the housing market is a prime example of this. 

The pandemic housing boom saw massive price growth as unparalleled demand was met with insufficient supply. Home price growth persisted until its peak in the middle of this year. Since then, prices have been slowly coming down as a result of high mortgage rates curbing demand. The housing market has been stuck in neutral recently, but falling home prices and stabilizing mortgage rates could help bring affordability within reach — especially for first-time homebuyers. 

Why Is the Fed Slowing Its Pace?

Up until their December meeting, the Fed has not lifted their foot from the gas pedal. At four consecutive meetings, the Fed hiked its rate by 75 basis points.

The Fed has moved aggressively in raising rates. “And the reality is, it’s working. They started late but they’re catching up to where things are,” Gondeck says. 

Still, the Fed must walk a thin line between remaining aggressive and going too far too fast. By opting for a hike of 50 basis points, rather than 75, the Fed is pushing for a soft landing, rather than a full-blown recession. 

“This way Powell can continue with his agenda to slow the economy down but help create a softer landing, a more moderate recessionary environment,” Poljak says.

To achieve a soft landing, or a moderate recession, the Fed will continue to keep a close eye on incoming inflation data from the housing market. 

“The housing market is the leading indicator of a recession,” Kushi says. “But traditionally, it has also aided the economy in recovering from one.” 

What the Fed’s Projections Mean for Mortgage Rates

In their December meeting, the Fed not only adjusted rates but offered projections for 2023. 

The most recent inflation report offers a glimmer of hope, but it isn’t enough for the Fed to pull back from rate hikes just yet. Until they see hard evidence that inflation is at or below where the federal funds rate is for several quarters, the Fed indicated they won’t feel confident easing up on rate hikes until the federal funds rate reaches 5.1%, slightly higher than expected. That means the Fed will increase rates by another 50 to 75 basis points next year.

However, further increases may not mean drastic changes for mortgage rates. Signs of cooling inflation are likely to help mortgage rates stabilize at a lower level, albeit higher than previous years. 

“I think the rate hike is pretty much already priced into the market. The Fed is going to raise their short term rate by half a percent. But from there, it’s going to matter more what they say about the future, and specifically, the tone they use,” Gondeck says. 

How Homebuyers Can Deal With Changing Rates

No matter what’s happening in the markets, people will always need to buy homes, and you might be one of them. While the headlines can be concerning, there’s still plenty of opportunity for potential homebuyers

“Now that mortgage rates have come down, buyers are in a better position to match that buyer-seller transaction,” Gondeck says. “As sellers bring down their expectations for the market, we’re actually optimistic that the housing market will stabilize itself next year.”

We’ve haven’t seen a buyer’s market in more than two years as rising prices and mortgage rates have crimped affordability. As buyers’ and sellers’ expectations fall more in line, experts predict the housing market to balance out.

Shop Around for Lenders

In a rising rate environment, it’s a good idea to shop around for lenders to see who can offer the best rate. Experts also suggest getting pre-approved for a mortgage to give you a better idea of what your monthly payments will look like. 

Remember, the average rate may not be the one you qualify for. Depending on your financial situation, a lender may offer a rate that’s higher or lower than the average. So, it’s a good idea to do things like boosting your credit score and paying down high-interest debts. 

Stick to Your Budget

Making and sticking to a budget is timeless advice, but especially for potential homebuyers. 

“My advice is always to budget. That goes for home buying and also for household spending. There will be a lot of volatility over the next year, so make sure you’re saving adequately and planning for uncertainty when you can,” Kushi says. 

You may even consider starting a sinking fund to start saving for your future down payment or closing costs. High-yield savings accounts allow you to easily take advantage of this rising rate environment because they offer better-than-average returns.

Keep an Eye on Rates

Mortgage rates don’t track the Fed’s rate hikes in the same way as other short term products, like home equity lines of credit (HELOCs), do. So, it’s important to keep an eye on where rates are going in order to make the best decision for yourself. 

“I think the 7% mortgage rate scared a lot of buyers out and hearing that the Fed is going to raise rates again may keep them out. But mortgage rates have actually fallen over the last two months,” Gondeck says. “Even though the Fed is going to raise rates, supply and demand still determine where mortgage rates are in this cycle.”

Pro Tip

In a rising rate environment, it’s a great time to save for a future down payment and closing costs in a high-yield savings account.