Housing market: Will mortgage rates continue to rise? How much higher can they go?

Those who purchased their house and selected a fixed-rate mortgage may be in better luck after the US Federal Reserve has moved to increase interest rates by more than three percent over the last six months.

Most homebuyers opt for a 30-year-fixed rate mortgage that locks them in at a higher rate than what may be available to those interested in a variable-rate loan, but in the long term, the average rate paid tends to be lower.

Currently, the average fixed rate on a mortgage in the US stands at 6.9 percent, the highest rate since the early 2000s. Just a year ago, the average stood at 3.05 percent, highlighting the dramatic steps the Federal Reserve has taken in an attempt to quell inflationary pressure in the market.

For those interested in purchasing a home, these rate hikes mean that monthly mortgage payments could be three percent higher compared to those who closed on a home last year.

Will the Federal Reserve increase rates even further?

Yes. According to CNBC, insiders at the Federal Reserve believe rates will settle between 4.5% and 4.75% by the end of the year.

Why will rates continue to increase?

Chairmen Jermone Powell, as the head of the US’ central bank, only has control over the demand side of market movements, not supply. Much of the inflation we are seeing in the market is being driven by a lack of supply to meet increased consumer demand. This is especially true in the housing market. With people flooding housing markets in 2020 and 2021, coupled with historically low low-interest rates, demand soared. Now, as interest rates move up, demand is cooling across the country.

What will the impact of increased rates be on inflation?

The Federal Reserve has two mandates.

The first is to ensure conditions for steady and healthy growth exist in the economy.

The second is to create conditions for full employment, or in other words, a tight labor market. We are currently in a tight labor market, evidenced by an unemployment rate of 3.5 percent and high levels of movement of workers to different jobs in search of better pay and benefits. As the economy has reopened, workers, millions of which lost their jobs with the pandemic hit, have had more choice and power to negotiate higher salaries.

While full employment and choice for workers is touted as a politically important priority by Democrats and Republicans, it contradicts the forces at work within our current economic framework since it threatens growth. To compensate and not lose profits when wages increase, companies increase prices, which can create an inflationary cycle. Without additional supply, prices will reach a point where they are no longer profitable because sales have fallen so far. Then companies will either have to cut supply or lower prices, but in most cases, one has to lower prices, particularly with goods need for survival like food, water, energy, and shelter.

Economic crisis looms large when prices reach levels that consumers cannot pay. If revenues are unable to keep up with debt payments, firms may have to decrease bankruptcy. In these cases, firms can go under, and unemployment increases as layoffs ripple across markets. Sadly, if unemployment increases, inflation is likely to decrease because demand falls rather quickly as a result of the US’ pitiful unemployment insurance systems. While benefits are distributed to some workers who qualify, they are often a fraction of one’s former salary and can send household financial chaos as their purchasing power takes a serious hit.