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  • Writer's pictureNancy Bennett

Mortgage rate rollercoaster: Why rates are dropping despite the latest big Fed increase

Updated: Dec 13, 2022

*most of this article was borrowed and written by Katie Collins

The Federal Reserve announced a 0.75-point interest rate hike Wednesday, but experts believe its influence on the mortgage market was already baked in. “The market’s already priced in an increase,” says Peter Boomer, executive vice president at PNC Bank.

Around the same time as the Fed’s rate increase announcement came out, new data showed the average 30-year fixed mortgage rate made a big move in the opposite direction! The average 30-year fixed rate was 5.59% — 17 points lower than last week.

This decrease comes after a volatile June and early July that saw rates swing up and down. A larger-than-expected inflation rate of 9.1% was released earlier in July. In response, the Fed suddenly switched from eyeing a 0.50-basis-point hike in its benchmark short-term interest rate to a larger 0.75-point hike to address the higher inflation. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” according to the Federal Reserve’s recent press release.

What to expect: How mortgage rates will be affected after the July hike

The Fed’s actions aren’t directly related to mortgage rates, but do affect lenders’ cost of funds, says Eileen Derks, senior vice president and head of mortgage at Laurel Road, an online lender owned by KeyBank. Most lenders have already priced in expected increases in those costs because of inflation. “Costs aren’t always directly related to the Fed changes, but there have been parallels since last December,” she says. Mortgage rates often move in anticipation of expected increases in lenders’ costs to avoid sudden sticker shock, she adds.

Still, future mortgage rate volatility would not come as a surprise. “I think we’re going to be in a little bit of a rollercoaster” as the country navigates efforts to bring down inflation and avoid a recession, Boomer says.

This latest Fed rate hike has implications for other parts of your financial life. It will likely lead to a higher cost of borrowing, with increased interest rates for credit cards, along with home equity loans and lines of credit (HELOCs). On the other hand, the rate increases bring good news for savers, in the form of better yields on high-yield savings accounts and other savings tools.

Experts agree the latest Fed rate increase and its potential impact on the mortgage market shouldn’t cause homebuyers to pause or drastically alter their plans. The rate and terms a borrower gets quoted depends more heavily on a borrower’s personal credit, loan type, and what mortgage lender they choose.

How the Fed’s rate hike affects mortgage borrowers

Homebuyers are feeling the effects of both rising home prices and mortgage rates. Home prices are hitting all-time highs, but higher mortgage rates have softened some demand for homes.

A slower housing market could lead to prices coming down in some markets. “There’s about 15 to 16 markets that will correct, whereas others will just slow in their appreciation or just stay flat,” Derks says. This could give buyers back some bargaining power they lost during the hottest years of this housing boom.

Because of the higher mortgage rates, the summer homebuying season will have fewer bidders and homes won’t be selling over the asking price at the rate they are right now, says Selma Hepp, deputy chief economist at CoreLogic. We’re seeing this in our local market over the past few weeks, too. Longer days on market, buyers hitting pause or just stepping back on their home purchases for a bit.

If you’re considering a home purchase this year, there are many things you can be doing in the meantime to improve your position, and take advantage of the market opportunities that are presenting themselves. I’ll discuss this in one of my next posts.

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