Homebuyers will face high borrowing costs despite Fed decision

LOS ANGELES (AP) — Homebuyers should get used to painfully high mortgage rates, despite this week’s signal from the Federal Reserve that it could finally pause its one-year rate hike campaign.

The Fed on Wednesday raised its short-term rate to around 5.1%, the highest since 2007.

While the Fed has refrained from declaring an end to the hikes, it has actually raised the possibility of pausing them after a streak of 10 hikes dating back to March 2022.

A pause would likely lower mortgage rates only slightly, said Greg McBride, chief financial analyst at Bankrate.com.

“Any significant and sustained decline in mortgage rates will require further easing of inflationary pressures and a continued slowing of the economy,” McBride said.

Although inflation fell from a high of 9.1% last June, it is still well above the Fed’s 2% target rate, despite signs of a slowing economy. The country’s GDP grew at an annual rate of just 1.1% in the January-March quarter, compared to 2.6% growth in the previous quarter. Consumer spending, which accounts for 70% of US economic activity, stagnated in March for a second straight month.

Further weakening could help push mortgage rates down, although the reverse is also true.

“There is still uncertainty in the economy,” said Lisa Sturtevant, chief economist at Bright MLS. “There’s a chance that mortgage rates will go down, but I think we’ll still be in the 6% (range), though.”

Changes in the Fed’s benchmark lending rate don’t directly affect mortgage rates, but they do influence the yield on 10-year Treasury bills, which lenders use as a guide for pricing home loans. This is because higher rates push bond prices down, leading to higher yields.

Investors’ expectations for future inflation and global demand for US Treasuries also influence mortgage rates.

The average rate for a 30-year mortgage hit a two-decade high of 7.08% last fall after months of Fed rate hikes and stubbornly high inflation. This week it averaged 6.39%, down slightly from last week, according to mortgage buyer Freddie Mac. A year ago, it averaged 5.27%.

Higher borrowing costs and a shortage of available homes are largely to blame for a 22% drop in home sales in the 12 months to March, marking eight consecutive months of annual sales declines of 20% or more.

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