As just about everyone expected, the Federal Reserve decided not to increase the federal funds rate this week, opting to hold short-term interest rates steady at 5.25%. No surprises there.
But here's the kicker: The Fed also says it will need to do another rate hike before the end of 2023 if it wants to achieve its goal of slowing inflation. The rate is now expected to end the year at 5.6%.
What’s more, analysts have been anticipating the Fed to announce a series of upcoming cuts to the federal funds rate next year, implementing a total of four cuts by the end of 2024. That’s not going to happen: The Fed’s latest economic outlook calls for only two rate cuts, which means rates are going to stay higher for longer.
In a press conference on Wednesday, Fed Chairman Jerome Powell said the agency is "in a position to proceed carefully," regarding future decisions.
As Dan Richards, executive vice president of mortgage and title at Flyhomes, tells me, "There's simply too much risk and not enough benefit for the Fed to tell us there are no additional hikes coming."
What does this mean for the housing market?
Well, it’s not exactly good news. Mortgage rates are likely to hover between 7% and 8% for now, and buyers “shouldn’t expect a major decrease in 2023,” Richards says.
They should steel themselves for high rates into next year as well, though how high is still up in the air.
For house hunters, this is yet another kick in the pants. Buyers are already in a tight spot: Home prices keep climbing, and the average mortgage payment is nearly $400 higher than it was a year ago. Real estate sales are stalling and available inventory is nowhere near where it needs to be.
The silver lining is that things will probably get better soon. Fannie Mae analysts predict that the Fed will decrease the federal funds rate by 0.25 percentage points next summer, meaning mortgage rates will also likely fall. And the Fed’s own economic projections are anticipating two rate cuts next year.
Still, we have to take all this with a grain of salt. The economy can take a sharp turn in either direction and even the best-researched forecasts can go up in smoke (we've definitely been burned before). For now, anyone venturing into the housing market better prepare for a wild ride.
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