The week ending May 5, 2022, saw rising interest rates following a short hiatus. Thursday, Freddie Mac reported the 30-year fixed-rate average soared to 5.27%, and the 15-year fixed-rate average rose to 4.52%. 

IMG_0086Source: Freddie Mac 

Mortgage Rates and the Federal Funds Rate

On Wednesday, the Federal Reserve raised its benchmark interest rate, also known as the federal funds rate, by half a percentage point to reduce inflation. Wednesday’s interest rate hike is the most forceful one yet in its battle to bring down a four-decade high in inflation.

IMG_0087.  Fed Chairman Jerome Powell - Source: law.com

Fed Chairman Jerome Powell addressed “the American people” during Wednesday’s news conference saying, “Inflation is much too high, and we understand the hardship it is causing. We’re moving expeditiously to bring it back down . . . we’re strongly committed to restoring price stability.”

The federal funds rate affects Americans in various ways, from groceries to life insurance policies to credit card interest rates and mortgages. The increase is a deliberate attempt to raise borrowing costs in order to slow demand. 

Mortgage Rates: Indirectly Affected by the Federal Funds Rate

Although mortgage rates are not directly tied to the benchmark rate, they are greatly affected. 

Mortgage interest rates are determined based on many factors, such as the housing supply and inflation. However, they are indirectly affected by the federal funds rate. 

The federal funds rate influences how much banks are charged to borrow money. Since banks borrow money from the Federal Reserve, banks charge consumers more money to borrow from them when the federal fund rate rises.

What Do Future Mortgage Rates Look Like?

Before the rate hike, Bankrate Chief Financial Analyst Greg McBride said, “All signs point to higher rates. In May, the benchmark 30-year fixed mortgage rate will be between 5.5 and 5.75 percent for the first time since 2009, and even 15-year fixed rates will climb to around 4.75 to 5 percent.”

Most experts agree mortgage rates will continue to climb. According to the Mortgage Bankers Association (MBA), the end of April saw mortgage applications drop 17% from this time last year. And according to Redfin, 12% of homes on its site experienced reduced sales prices in early April. In March, the National Association of Realtors (NAR) data showed a 2.7% drop in existing home sales since February and a 4.5% drop year-over-year

IMG_0089.                                                                          Source: NAR

Deputy chief economist at Redfin, Taylor Marr said, “If I were to pick one metric as a leading indicator [of where the housing market is headed]; it’s really mortgage rates rising at their fastest pace in history. It’s one of the earliest signs the market is changing.”

With interest rates on a quick rise and a slight dip in listing prices, this is an intelligent time to lock in an interest rate. If you are in the market to buy or sell your Northern Virginia or Washington D.C. home, let’s talk!

Khalil El-Ghoul

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