Rising Mortgage Rates: What You Need to Know as Fed Evaluates Monetary Policy

After the Federal Reserve moved to increase interest rates in response to growing inflationary pressure, those tacked onto 15- and 30-year mortgages also began to rise. The Fed controls the federal funds rate (FFR), the baseline interest rate financial institutions use to protect themselves. Seen as the lender of last resort, the FFR is an indicator of the risks that exist in the economy.

When the FFR is pushed up, the Fed aims to show that the risk of lending is higher, thus encouraging savings. In a lower-rate environment, the threat of borrower defaulting is thought to be lower, thus promoting the movement of money through the economy faster.

Interest rates may dampen buyer demand

As the FFR has increased, mortgage rates have ticked, and last week, they stood at 6.26 percent and 6.94 percent for a 15-and-30-year loan, respectively. While the rate for 15-year mortgages fell, the rate for 30-year loans increased. Freddie Mac, the agency that publishes this weekly data, reported that rates have reached “a two-month high and [are] flirting with seven percent yet again.” While the spring tends to be a major period for homebuying, Freddie Mac stated that higher rates may ‘dampen’ buyer interest.

While sales of newly built homes are trending in a positive direction, higher rates and elevated prices continue to pose affordability challenges that may leave potential homebuyers on the sidelines.

Freddie Mac

The most recent data from the housing market

In January, the National Association of Realtors reported that housing inventory on the market reached 1.1 million homes after falling below that threshold in December (990,000).

Additionally, January saw home sales rise 3.1 percent. If sales stay on track, the “seasonally adjusted annual rate” would hit four million, up from 3.8 million in October but down from the 4.5 million recorded in February 2023. As far as prices are concerned, they continue to rise, with the median rising $379,100 in January, representing a 5.1 percent increase between January 2023 and January 2024. Compared to a year prior,