Mortgage rates have risen. Now what? Local experts offer advice to potential homebuyers

By LOYD MCINTOSH

When the Federal Reserve raised interest rates in early February to combat inflation, one area of concern for many potential homebuyers was how the Fed’s actions would affect mortgage rates and their ability to afford a new home.

However, Clint Thompson, a mortgage officer with Fairway Independent Mortgage Corp. in Inverness, says the perception that mortgage rates automatically increase following a rise in interest rates is incorrect. “There is always misinformation out there when people hear what the Federal Reserve is doing. They think, ‘Oh gosh, mortgage rates jumped a quarter of a percent,’” Thompson said.

While it is true that interest rates and other signals from the Federal Reserve influence the economy, Thompson said mortgage rates are more closely related to inflation rates than direct action from the Federal Reserve. Thompson explained that the interest rate hike should eventually have the opposite effect on mortgage rates if inflation slows.

“Mortgage rates can come down when the Fed makes a hike, because overall it’s more about inflation than interest rates,” Thompson said. “You may see that 30-year mortgage rates actually improve because the markets interpret that as a positive move.”

Largely due to government spending during the COVID-19 crisis, the U.S. inflation rate grew at a rate of 6.5% in 2022, according to data published by the U.S. Department of Labor in mid-December, after growing to 7.1% in 2021.

Among the areas the government spent additional funds, according to Thompson, were mortgage-backed securities and treasuries, which kept mortgage rates from organically adjusting to market forces, a concept known as “quantitative easing.”

“The Fed basically ignored the whole inflation factor and continued to buy treasuries and mortgage-backed securities,” Thompson said. “That artificially kept interest rates down close to 3%.”

As the government slowed quantitative easing measures over the past 12 months and raised interest rates in February, mortgage rates rose from an average of 3% for a typical 30-year mortgage to just over 6% in under a year, While the rapid rise may create sticker shock among homebuyers, Thompson said the market is responding organically to the Federal Reserve’s policies and, although mortgage rates spiked to more than 7% recently, potential homebuyers should start seeing rates lower in the second and third quarter of 2023.

“We’ll just have to see how it all plays out, but the consensus is we should see 30-year mortgage rates close to 5%, maybe even just a fraction below 5%, sometime this summer,” Thompson said.