The Fed will make an interest rate decision next week.

The Federal Reserve’s Interest Rate Hikes Impact Home Buyers

Since March 2022, the Federal Reserve has been implementing multiple interest rate hikes, resulting in a significant toll on home buyers. The typical mortgage rate has soared above 8%, a level not seen since 2000. This surge in rates has made it increasingly challenging for buyers to enter the real estate market.

On November 1, the Federal Reserve will decide on yet another interest rate adjustment that could have further implications for the home loan market.

Expectations for Rate Stability

Economists surveyed by FactSet predict that the central bank will maintain steady rates at its upcoming meeting. This projection comes as credit cards are currently charging the highest interest rates on record, exacerbating the financial strain on home buyers. The rising loan costs have priced many potential buyers out of the market.

The Indirect Effect on Mortgage Rates

While a pause on rate hikes may offer some relief from increasing borrowing costs, financial experts suggest that it may not immediately translate into lower mortgage rates. This is because mortgage rates don’t always directly mirror the Fed’s rate increases. Instead, they tend to follow the yield on the 10-year U.S. Treasury note, which recently reached a 16-year high.

According to Jacob Channel, a senior economist at LendingTree, there is a high probability that the average rate on 30-year fixed mortgages could be near or even slightly above 8% by the end of 2023.

While mortgage rates have largely increased in tandem with the Fed’s benchmark rate, other factors such as investors’ expectations for inflation and global demand for Treasurys can also influence rates on home loans.

Anticipated Decrease in Mortgage Rates in 2024

Economists from FactSet foresee a potential easing of mortgage rates in 2024. They predict that the Fed may begin to lower rates by mid-year.

Matt Vance, senior director and Americas head of multifamily research for real estate company CBRE, agrees with this outlook. He expects the Fed to pause rate hikes into the next year and possibly even initiate a rate cut in the second quarter.

In the meantime, home buyers are grappling with an affordability crisis due to the combination of escalating interest rates and rising property prices. The national median home price surged to $430,000 in September from $400,000 in January, according to Realtor.com.

Furthermore, LendingTree’s study revealed that the average down payment in the 50 largest metropolitan areas now ranges between $47,900 and $84,983.

Consequently, some prospective buyers have put their house-hunting plans on hold, while many existing homeowners are hesitant to sell and incur the high borrowing costs associated with purchasing new properties.

Goldman Sachs analysts claim that interest rates may lead to a continued hesitation among Americans to buy homes next year. They predict the fewest annual existing home sales since the early 1990s at 3.8 million.

The impact of higher interest rates and housing prices has already caused a slowdown in the housing market this year. According to the Mortgage Bankers Association, mortgage applications have declined in recent weeks, and existing home sales fell by 2% in September, according to the National Association of Realtors.

Despite these challenges, some Americans have managed to purchase homes this year. However, as Jacob Channel points out, today’s housing market is much less lively than it was during the height of the pandemic.

The Associated Press contributed to this report.