Report: Fed’s Last 0.5 Percent Rate Hike of 2022 ‘Cooling’ Housing Market

The seventh and final Federal Reserve interest rate hike in 2022 of 0.5% is starting to cool down the housing market, but is not yet impacting record inflation, Bankrate reported earlier this month.

The Fed increased interest rates by 0.5% on Dec. 14 in addition to raising rates by 0.75% six previous times this year, and the impacts are just starting to be felt in the hot post-COVID-19 pandemic housing market, the report said.

“The cumulative effect of this sharp rise in rates has cooled the housing market and caused the economy to start slowing, but hasn’t done much to lower inflation,” Greg McBride, Bankrate’s chief financial analyst, said in the report.

According to the report, the housing market has cooled since late summer as property value increases slow and selling prices began dropping in many markets.

“The housing recession is here,” Marty Green, principal at mortgage law firm Polunsky Beitel Green said in the report. “The big question now is how quickly it spreads to the rest of the economy.”

Generally, the Federal Reserve increases interest rates to slow consumer spending, which can bring down inflation as prices on goods and services decrease to adjust for less demand.

But the increases this year, the largest since the 1980s, have seen mortgage rates jump more than three full percentage points, going from 3.4% in January to 7.12% in October, before the Fed’s latest increase.

“Such increases diminish purchase affordability, making it even harder for lower-income and first-time buyers to purchase a home,” Clare Losey, assistant research economist at the Texas Real Estate Research Center at Texas A&M University, said in the report.

Some financial experts see the increases as moving the housing market back to “normalcy” following the overheated market in the immediate aftermath of the pandemic.

“The combination of elevated mortgage rates and steep home-price growth over the past few years has greatly reduced affordability,” Mike Fratantoni, chief economist for the Mortgage Bankers Association, said in the report. “The volatility seen in mortgage rates should subside once inflation begins to slow and the peak rate for this hiking cycle comes into view.”

The report said that the cooling market is identified by an increase in the housing supply inventory of the National Association of Realtors.

That shows the inventory supply of a 1.6-month record low in January, jumping to a 3.3 months’ supply in October.

As volatility continues in the market, real estate purchasers are advised to avoid annual rate mortgages as further Fed rate increases are likely on the horizon.

“Don’t fall into the trap of using an adjustable-rate mortgage as a crutch of affordability,” McBride said. “There is little in the way of up-front savings, an average of just one-half percentage point for the first five years, but the risk of higher rates in future years looms large. New adjustable mortgage products are structured to change every six months rather than every 12 months, which had previously been the norm.”