The Federal Reserve voted Wednesday to raise its short-term interest rates, and that likely will mean more mortgage rate increases are on the horizon. The Fed’s rates are not directly tied to mortgage rates but tend to follow 10-year Treasury bonds. However, mortgage rates are often influenced by the Fed’s rates.
The Fed increased its federal fund rate from 1.5 percent to 1.75 percent, which is the highest level since 2008. The Fed’s move Wednesday marks the first of what many economists predict will be three rate hikes this year. Some economists are predicting the federal funds rate to be at 2.1 percent by the end of the year.
“Mortgage rates do not move one-on-one with the Fed tightening, but clearly consumers should anticipate higher mortgage rates as time proceeds,” says Lawrence Yun, chief economist at the National Association of REALTORS®.
Mortgage rate hikes have already become a nearly weekly occurrence in 2018. Mortgage rates have risen every week since the start of the year, with last week being the exception.
Following the Fed’s move, buyers will need to brace for further hikes, cautions Danielle Hale, realtor.com®’s chief economist. “While they may find some days or weeks and maybe even a month or two where mortgage rates trend lower, the general direction in the months ahead is up,” Hale notes in a column at realtor.com®. “Mentally and financially, buyers should prepare for higher rates and look to any deviation from that trend as an opportunity.”
The tight labor market will likely prompt the Fed to raise rates more rapidly in the coming months, Yun says.
“Housing costs are also rising solidly and contributing to faster inflation,” Yun says. “The one thing that could slow the pace of rate increases would be to tame housing costs through an increased supply of new homes. Not only will more home construction lead to a slower pace of rate hikes, it will also lead to faster economic growth. Let’s put great focus on boosting home construction.”