Why the Fed’s interest rate hike is ‘good news for mortgage rates’

These hikes don’t directly impact mortgage rates. But when the Fed moves rates, that indirectly affects housing.

Mortgage rates instead tend to move alongside the 10-year Treasury yield.

“The Federal Reserve controls short-term rates, but long-term rates, including 30-year mortgage rates are a function of market expectations for the path of the economy,” Mike Fratantoni, chief economist and senior vice president at the Mortgage Bankers Association, said in a statement. 

“And investors are betting that the economic slowdown and the Fed’s eventual victory over inflation will result in lower rates over time,” he added.

The industry group is expecting mortgage rates to drop, ending the year closer to 5%, rather than the 6%-range that’s presently being quoted. Last year, the 30-year was averaging at 3.45%

Fast-rising mortgage rates have tamped down demand for mortgages, with applications falling 9% over the last week, the MBA said.

Others are predicting a drop in mortgage rates as a result of the Fed’s action.

“Softer inflation of late led to a softer rate increase today,” Lawrence Yun, chief economist and senior vice president at the National Association of Realtors, said.
“As inflation calms further … the Fed will adjust to a no-rate increase by the middle of the year and even a rate cut by December,” he added. “That is good news for mortgage rates, which will possibly fall to 5.5% by the year end.”

The average contract rate for a 30-year fixed-rate mortgage for a home was 6.19% as of January 27, the MBA said on Wednesday morning.

But not all mortgages are in the same boat: The Fed’s rate hike will affect adjustable-rate mortgages, however, noted Realtor.com’s George Ratiu. That’s because ARMs, and even home equity lines of credit, are more closely tied to the Fed’s benchmark rate.

The rate for adjustable-rate mortgages rose to 5.38% for the week ending Jan. 27, according to the MBA.