The fed’s rate hike is intended to create less competition in the real estate market

When the Federal Reserve announced another 75 basis point rate hike Wednesday, loan officers and credit managers – already aware of the news – looked ahead and wondered whether mortgage rates would rise or fall as a result.

Even economists are divided on what's coming: Some believe interest rates have already peaked; others say they will rise until the country's economy officially enters a recession.

But they agree on one thing: Higher interest rates will dampen demand for housing, allowing inventory to recover and eventually spurring the return of reluctant buyers.

"For consumers, this (rise in interest rates) means mortgage rates are likely to rise unless the economy shows additional signs of tipping into a recession, which will weigh on housing demand," said Danielle Hale, chief economist at Realtors.com

Mortgage rates surpassed 6% in the run-up to the Fed's June rate hike as higher-than-expected inflation data triggered volatility in the market, causing turmoil in mortgage rates. Since the Fed's 75 basis point rate hike in June, mortgage rates have crept closer to 5.5 percent in recent weeks.

Laurence Yun, chief economist for the National Association of Realtors, doesn't believe a 75 basis point increase in interest rates will have an impact on mortgage rates. The long-term bond market, on which mortgage rates are typically based, "has largely priced in any future Fed action and may have peaked as early as mid-June, when 10-year Treasury bonds shot up to 3.5 percent". Yun added.

"It is possible that the interest rate on 30-year fixed-rate mortgages will settle at 5.5% to 6% for the rest of the year," Yun said. "Still, mortgage rates are significantly higher now than they were a year ago, which is why home sales have declined."

An executive with the Mortgage Bankers Association (MBA) also believes mortgage rates may have peaked and could hold steady between 5% and 5.5% through the end of 2022. An improvement from the 6% level, but still well above the 3% level seen in early 2021.

"There is a tug-of-war in market expectations between continued high inflation numbers and the resulting rapid Fed rate hikes and the increasing risk of a sharp slowdown and possible recession," said Mike Fratantoni, senior vice president and chief economist at MBA.

When mortgage rates peak, Fratantoni said, "potential buyers who were scared off by the rate hike may find their way back into the housing market."

The last spike had clear consequences. New home sales fell more than 8% in June from the previous month and were 17% below June 2021, according to the U.S. Census. Contracts signed to buy existing homes fell more than expected in June, down 8.6% from May and down 20% from June 2021, according to the National Association of Realtors.

Home prices also rose, albeit at a slower pace. National home price growth slowed in May, posting an annual gain of 19.7%, compared with a 20.4% increase in April and a 20.6% jump in March, according to the S&P CoreLogic Case-Shiller national home price index.

Yun expects home sales to return when mortgage rates stabilize near current rates and believes home sales will depend on jobs and consumer confidence.

"Job creation has continued through today. As a result, home sales may soon stabilize within a few months and then turn steadily upward starting early next year, Yun said.

Hale of Realtor.com said declining demand and higher costs mask some bright spots for home shoppers.

"While options are more expensive and costlier to finance, the growing number (of home sales from a year ago) will help rebalance the housing market and give potential buyers a much-needed boost," Hale said.

According to Marty Green, director of advocacy for mortgages, any increase in availability in warehouse deserts would be enough to lure buyers back into the market Polunsky Beitel Green.

"The question is whether the slowdown is due to most consumers simply pausing a buying decision while they see where interest rates and home prices settle, or whether they need to postpone a buying decision indefinitely for affordability reasons," Green said.

Some LOs believe the rate hike is already baked into mortgage rates, so they don't expect extreme volatility like last month's.

"There was no major panic (like there was in June)," said Christian Dicker, senior loan officer at Motto Mortgage. "I think it's already priced into the marketplace."

Dicker suggested that a slowdown in the housing market is good to some degree because it means less competition for buyers – a welcome change after months of increasingly intense bidding wars in which anything other than an all-cash offer was fraught with inherent uncertainty.

"In the last two weeks, more offers were accepted than in the last two months. You (homebuyer) are looking at four homes and all are available. You make one or two offers and they are accepted," Dicker said.

Affordability remains a challenge, but some buyers "are coming to terms with higher interest rates because they know they'll have to pay more if they want the property," said Coley Carden, vice president of residential lending at Winchester Cooperative Bank.

"As interest rates rise and home price appreciation slows, demand for homes will stabilize," Carden said.

Although he doesn't see 20 offers for each property as he did during the pandemic, Carden still receives inquiries for houses and even second homes.

"I think what could limit homebuyer demand is more of a recession – especially if people have fewer hours and start getting laid off," he said.

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