Is housing about to get more affordable after paused Fed rate hikes?

Homebuyers could see little relief in mortgage rates in the short-term, even after the Federal Reserve paused its series of interest rate hikes that drove up mortgage pricing following a period of historic lows.  

Instead, buyers’ new normal for 2023 could be mortgage rates fluctuating consistently yet holding between 6 and 7 percent, should inflation remain high. 

But even as figures show that housing costs continue to drive inflation, moderating prices on the rental side in the next six months could offer renters a reprieve. 

How Fed rate hikes impacted mortgage rates 

The central bank’s aggressive monetary tightening policies over the last year have put pressure on the housing market — which is sensitive to interest rates — and made harsh conditions even worse for both buyers and sellers. 

High rates have kept many would-be buyers on the sidelines while prompting some sellers to stay put and tied to their low mortgage rate, which has put further pressure on housing supply. 

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Rates soared in the months immediately following the Fed’s first interest rate hike last spring and rose to above 7 percent by November. Since then, average mortgage rates have settled, but hovered above 6 percent. 

Still, economists' views vary widely on whether the central bank's pause will lead to substantially lower mortgage rates for buyers. 

“Home sales have been stabilizing, though at low levels. The future direction of the housing market depends on how mortgage rates move. Any decline in rates will result in more buyers in the market and more home sales,” Lawrence Yun, chief economist at the National Association of Realtors, told The Hill. 

Yun added that although rates will fluctuate in coming months, he does not expect significant declines. 

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Mortgage data released by Freddie Mac a day after the Fed’s meeting last week showed rates inching down again, with the average 30-year fixed rate falling to 6.69 percent.  

“As inflation continues to decelerate, economic growth is slowing and the tightening cycle of monetary policy is reaching its apex, which means mortgage rates are expected to decrease later this year and into next,” Freddie Mac Chief Economist Sam Khater said in a statement. 

Yet longer-term data shows that despite fluctuations in average mortgage rates, the benchmark 30-year fixed rate has stayed consistently high, between 6 and 7 percent, Keeping Current Matters (KCM) Chief Economist George Ratiu told The Hill. 

“Based on my reading of inflation, as well as the Fed’s policy, I expect that to continue being the rate at least over the next few months. If anything, I would almost call that the new normal for 2023,” Ratiu said. 

Inflation is cooling but driven by high housing costs  

Meanwhile, inflation data released prior to the Fed meeting showed the annual growth rate reaching its slowest pace since 2021. Consumer prices rose just 0.1 percent last month and are up 4 percent since last year, according to the consumer price index (CPI). 

But the cost of housing increased by 0.6 percent from April, making it the largest factor in the monthly increase in inflation. Prices are now 8 percent higher than they were a year ago on an unadjusted basis. 

Even so, CPI figures indicate rents are cooling, alongside asking rents, which have dropped in various parts of the country.  

The inflation data considered by the Fed is operating on about a six-month lag, Ratiu explained to The Hill. Given the already noticeable slowdown in rent growth, he expects further relief is on the way for renters. 

On the horizon: High housing costs push inflation up ahead of Fed meeting

There could also be more relief on the way for renters once a “huge influx” of apartment buildings comes online over the next year, he added. 

“So, if we look ahead another six months in light of what we're seeing today in rental prices, we're likely to see an even further slowdown, and that is likely to continue dropping the CPI lower,” Ratiu continued. 

“Given these lags, the short answer is I do expect the housing component of inflation to continue moderating, and in a sense — at least on the rental side — I do expect to see easing for a lot of tenants,” he said. 

Will the Fed raise rates again? 

Fed chairman Jerome Powell spoke after the Fed meeting last week about the disproportionate impact housing costs are imposing on inflation, telling reporters that it’s important that rental costs continue to decrease. 

“We do need to see rents bottom out here, or at least stay quite low in terms of their increases,” Powell told reporters. 

“We’re watching that situation carefully,” he said. “I do think we will see rents and housing prices filtering into housing services inflation.” 

Powell said the committee’s decision to hold rates would allow more time to evaluate the effect of recent monetary policies but he indicated more interest rate increases could be on the way if inflation remains elevated. 

“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2 percent over time,” he said.