In the short term, our interest rate forecast focuses on the Federal Reserve and its attempt to smooth out economic cycles. The Federal Reserve seeks to minimize the production gap (the deviation of GDP from its maximum sustainable level) and, at the same time, keep inflation low and stable. When the economy overheats (the production gap is positive and inflation is high), like today, the Federal Reserve seeks to raise interest rates to slow growth. At their last meeting, Fed officials said they expected to raise rates to a range between 4.25% and 4.5%, 125 basis points higher than their current level.
The Fed has raised rates by 75 basis points at each of its last three meetings and is expected to raise rates again in November and December. For investors looking for real estate to supplement equity and fixed income stakes, it can be a difficult time to be an investor. Questions about where the 30-year fixed mortgage rate is heading continue to add complexity to an already difficult decision-making process. Let's look at where mortgage rates could be headed and what that could mean for real estate investors right now.
In fact, as interest rates rise, real estate valuations tend to have a big impact. This is because a significant part of the traditional home purchase is financed. Because borrowers can pay less, sellers must lower prices to meet demand. This is the main objective of the Fed's rate-raising program right now, as housing inflation represents approximately 40% of the key CPI metric.
It seems that Zillow's optimistic forecasts may not materialize if mortgage rates rise in line with expert projections. Of course, these projections are normally made with retrospective data. So, if the Federal Reserve rotates, mortgage rates could be lower a year from now. It's very difficult to tell, and that's why forecasts are almost always wrong.
For now, it's going to be difficult for real estate investors to ride a sleigh. Those who want to buy right now will have to set rates of 7% with little chance of refinancing at lower rates, at least for the next two years. In addition, prices may continue to fall, meaning that the patient's approach can be rewarded. Even considering the Fed's rate hikes to date, it could be said that the current political stance remains almost neutral, that is, a rate that does not stimulate or contract economic activity.
Other experts call for property prices to fall by up to 20% if mortgage rates continue to rise. Last week, the Fed recorded a third consecutive increase in interest rates of 75 basis points, raising its target official interest rate range from 3% to 3.25%. The Federal Reserve has an idea of where interest rates could start to slow economic growth: the so-called “neutral” interest rate, but even so, those estimates are illusory. From the Federal Reserve's theoretical point of view, for inflationary labor market pressures to slow down, the unemployment rate must exceed the level of the Non-Accelerated Unemployment Inflation Rate (NAIRU), which is currently estimated by the Congressional Budget Office at 4.5 percent.
But the bottom line for homebuyers is that mortgage rates are expected to fall next year, Fratantoni said. The slowdown in real estate activity and the increase in mortgage rates will slow the rate of growth in home prices, according to the MBA. This year's interest rate hikes have seemed shocking because interest rates have been very low for a long time. .
