Surging mortgage rates could hit double digits by next year even if the Federal Reserve backs off its aggressive interest rate hikes, a prominent expert warned.
Fed rate hikes have a “lag effect in mortgages,” Christopher Whalen, chairman of Whalen Global Advisors, said in an interview with MarketWatch published on Thursday. That means the full effect of tightened Fed policy isn’t felt in the housing market for weeks or months after each hike.
“Lenders only slowly adjust their rates,” Whalen told the outlet. “They are not used to seeing rates moving this fast, and typically would change rates only once a month or once every other month.”
The Fed has been sharply hiking its benchmark interest rate for months as it looks to cool the economy and tame decades-high inflation. While the Fed’s hikes don’t directly influence mortgages, rates tend to move higher as policy grows more restrictive — resulting in higher costs for prospective homebuyers.
Whalen said mortgage rates could “easily touch 10% by February” even if Fed Chair Jerome Powell and other policymakers signal a pause in interest rate hikes at the central bank’s last meeting of the year in December.
The average 30-year fixed-rate mortgage hit 6.94% this week, according to the latest data from Freddie Mac. Mortgage rates have more than doubled since January and are expected to continue their climb for the foreseeable future.
Investors are projecting a more than 95% probability that the Fed will hike interest rates by three-quarters of a percentage point for the fourth straight meeting when they next convene on Nov. 1-2. Another sharp increase is expected at the Fed’s December meeting.
Ultimately, the Fed’s funds rate is expected to climb to a range of 4.75% to 5% — up from its current level of 3% to 3.25%. The rate was near zero at this time last year, highlighting the torrid pace of the Fed’s policy tightening.
As The Post reported, real estate firm Redfin warned earlier this week that the rapidly cooling US housing market was “going to get worse” in the near future. That warning followed data which showed home sales and new listings plunged to their lowest level on record, excluding the COVID-19 pandemic.
“The housing market is going to get worse before it gets better,” Redfin economics research lead Chen Zhao said in a blog post. “With inflation still rampant, the Federal Reserve will likely continue hiking interest rates. That means we may not see high mortgage rates — the primary killer of housing demand — decline until early to mid-2023.”
Pantheon Macroeconomics warned that home prices could fall by up to 20% by next year as sellers attempt to entice wary buyers back into the market.