The Fed Doesn’t Expect Rate Hikes Until 2023, but They Could Affect Today’s Housing Market

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In a vote of confidence in the nation’s strengthening economy, the majority of the Federal Reserve members now anticipate raising the interest rates twice in 2023. And while this wonky monetary projection may sound like a long way off, it could have a real impact on today’s overheated housing market.

In response to the news, mortgage interest rates could tick up a little in response. This could result in the scorching-hot and ultracompetitive real estate market softening just a touch.

The projections came out of a Federal Open Market Committee meeting held on Tuesday and Wednesday.

“With [housing] prices as high as they are, higher mortgage rates are going to make homes more difficult to afford,” says Realtor.com® Chief Economist Danielle Hale.

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The equation: If fewer people have the means to buy, it could ease the pressure on the market. Less competition could lead to  fewer bidding wars and mind-boggling offers over asking price.

Hale anticipates mortgage rates edging up just past 3% over the next few weeks for a 30-year fixed-rate loan. Rates averaged 2.96% in the week ending June 10, according to Freddie Mac.

If the Fed goes ahead and raises rates in 2023, Hale expects rates could climb to the mid-3% range or even as high as 4%.

While this may not sound like much of an increase, even fractions of a percentage point can have a substantial impact on a buyer’s bottom line. A single percentage point can add more than a $100 to a homeowner’s monthly payment and tens of thousands of dollars over the life of a 30-year loan, depending on the rate and size of the mortgage.

That could further slow down the market as more potential buyers could simply be priced out.

Mortgage interest rates are typically influenced by the Federal Reserve’s short-term interest rates. But they are more closely aligned with the 10-year U.S. Treasury bonds.

That’s because lenders typically bundle up mortgages they make and sell these mortgage-backed securities in the secondary mortgage market. This frees up cash they can use to make new loans. Investors view Treasury and mortgage bonds as safer, less lucrative investments than the stock market. If the economy is weaker, these bonds become more appealing. When it’s stronger or inflation is stronger, as it is now, investors aren’t as interested because the bonds are worth less if inflation is moving up quickly.

Mortgage rates typically move in the opposite direction of bond prices. So if the economy improves enough for the Fed to raise interest rates, fewer investors will be tempted to put money in bonds. That means mortgage rates will rise, but likely not by much—at least for now.

“People on the Federal Reserve think the economy is going to grow and be stronger faster,” says Hale. They are also expecting inflation to remain high through the year before it settles down.

“We know that the economy is rebounding remarkably well,” says Hale. “We know the labor market is healing remarkably well. There’s still room for improvement and plenty of people out of work. But considering where we were a year ago, the progress has been pretty phenomenal.”

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