Dana Peterson, chief economist at The Conference Board, said on Yahoo Finance Live. And that’s a function of, yes, very high prices affecting affordability, but also high interest rates.
The Fed raised interest rates by 75 basis points on Wednesday, and the central bank stated that it “expects that continued increases in the target range will be appropriate.”
Meanwhile, mortgage rates are at 5.4%, according to Freddie Mac, more than two percentage points higher than they were at the start of 2022.
The Federal Reserve sets the rates that banks use to borrow money from the central bank. As the Fed’s interest rates rise, it directly affects mortgage rates because lenders also tend to increase loan interest payments to homebuyers.
Fannie Mae’s home buying confidence index fell to 64.8 for the month of June, the second lowest reading in a decade. According to the survey, only 20% of consumers think the time to buy a home is now.
“When we look at our confidence actions, people say they’re falling back on their home-buying expectations,” Peterson said.
What might the Fed’s next move mean
For home buyers, higher interest rates usually reduce their purchasing power.
Pending home sales – homes that will be sold under contract – are a leading indicator of the health of the housing market. That number was down 20% last month versus June 2021.
Existing homeowners with fixed rate mortgages will not feel the same effect as buyers and sellers unless they consider selling their homes in the near future. However, homeowners with adjustable mortgage rates will see their interest payments increase in the future.
According to Peterson, that’s exactly what the Fed wants to see amid the current inflationary environment: “domestic demand easing,” with housing being a large component of it.
The demand for homes has increased over the past two years. During the height of the coronavirus pandemic, interest rates fell to historic lows. At the same time, many homebuyers have moved from the big cities in favor of suburbs and smaller towns.
“So you have millennials,” Peterson said. “They are all 40, have families, and they are looking for the next upgrade in housing. All of these are demands that the Fed wants to curb.”
Peterson predicts that the Fed is not yet done raising interest rates, noting that the central bank may even go into a “restricted zone,” which would be above 3% and even close to 4% by early 2023.
“We believe that the action, this very aggressive stance against inflation, will actually lead to a recession,” Peterson said, “the actual recession approved by the National Bureau of Economic Research, likely to start in the last quarter of this year.”
Federal Reserve Chairman Jerome Powell said the economy has not yet entered a recession during his latest press conference on Wednesday. “There are too many areas of the economy that are doing well,” Powell added.
Ethan is a staff writer at Yahoo Finance.
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