How a Fed Interest Rate Hike Could Impact Mortgages

The Federal Reserve is expected to raise its benchmark lending rate on Wednesday, a decision that is not what housing market experts were hoping for, analysts have told Newsweek.

When the Fed last month paused its aggressive series of 10 consecutive rate hikes to observe how the U.S. economy was reacting to its strategy, housing-market experts and economists praised the decision, warning against the devastating effect another hike could have on the sector.

"Mortgage rates have had a major impact on both buyers and sellers in 2023," Orphe Divounguy, senior macroeconomist at Zillow Home Loans, previously told Newsweek. "Rates that doubled last year sent mortgage costs soaring, pushing many buyers out of the market and others into smaller homes or less expensive areas. This year, rates have fluctuated, but remained relatively high."

Now, the Fed is likely to raise its key rate again.

"A rate hike from the Fed is as close to a sure thing as we get in this business," Kara Murphy, chief investment officer of Kestra Investment Management, told Newsweek. "But what matters more for the economy is not what the terminal rate is, but how long it stays there. And for that, the jury is still out."

Lawrence Yun, chief economist at the National Association of Realtors, told Newsweek that mortgage markets were expecting a new interest hike and had already priced that information in.

While the new raise is expected to be absorbed by the mortgage market with no major issue, "what is less certain is future rate hikes," Yun said.

"If the Fed says it could stand by for a while due to the long-lag impact of monetary policy, then mortgage rates could drop," he added. "The housing recession will be over, with more home buyers entering the market and, therefore, perking up home prices."

Yun had previously told Newsweek about the lag between decision and inflation which exists in monetary policy. "The rate hikes from earlier months have yet to exert their force at a time when inflation has already decelerated to 4 percent," he said, adding that the Fed should not continue to raise rates.

In June, the Fed said that it would raise its key rate twice more this year. If the July increase was included in these calculations, there is still at least one further hike to go.

"If the Fed says at the next meeting that it is likely to raise rates one or two more times to fully kill off inflation, then mortgage rates are likely to retest the cyclical peak rate of 7 percent and home buyers will be sidelined for longer," Yun said.

"Future rate changes will really depend on the inflation trajectory," Ruslan Lienkha, chief of markets at online currency platform YouHodler, told Newsweek.

"For instance, now we see that the inflation slows down and the interest rate has already exceeded the inflation level—such a situation is favorable to pause the rate hikes," he added. "But if we notice a change in the dynamic of inflation, like a sudden increase to 5 or 6 percent, there won't be other options but to raise the rates again."