BUYERS August 7, 2023

How Federal Reserve Decisions Impact Home Buyers

The housing market is a complex entity, continually influenced by a myriad of factors. One significant influence that often makes the headlines is the Federal Reserve’s (the Fed) decisions. As a potential home buyer, you might wonder, “how does this affect me and my plans to buy a home?” Let’s delve into it.

The Fed has been striving tirelessly to curtail inflation. Even though we’ve seen a cooling trend in inflation over the last 12 months, the most recent data shows it’s still running higher than the Fed’s target of 2%.

You might have hoped that the Fed would put a pause on their hikes, given the progress made towards their goal of reducing inflation. However, halting too soon could risk a rebound in inflation. Therefore, the Fed made the decision to increase the Federal Funds Rate yet again last week. As Jerome Powell, Chairman of the Fed, puts it:

“We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored.”

Greg McBride, Senior VP, and Chief Financial Analyst at Bankrate, provides further insight into how high inflation and a strong economy have influenced the Fed’s recent decision:

“Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more.”

Although a Federal Fund Rate hike by the Fed doesn’t directly control mortgage rates, it certainly has an impact. A recent article from Fortune sheds light on this:

“The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”

Understanding Its Effect on You
In simplest terms, high inflation corresponds with high mortgage rates. But there’s a silver lining. If the Fed is successful in reducing inflation, it could result in lower mortgage rates, thereby making it more affordable for you to buy a home.

As the data above illustrates, inflation (depicted by the blue trend line) is gradually decreasing. Historically, mortgage rates (represented by the green trend line) have followed suit. McBride shares his outlook on the future of mortgage rates:

“With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably.”

The Bottom Line
The fate of mortgage rates is intrinsically tied to inflation. As inflation cools down, we should expect to see mortgage rates decrease as well. Ensure you’re navigating these changes with a real estate professional you can trust for expert advice on how shifts in the housing market will affect you.

Remember, understanding the market is crucial in making the best decisions for your home-buying journey. You don’t have to navigate this complex process alone. Reach out to one of our agents today for expert guidance tailored to your unique situation. We’re here to help you make your dream home a reality!