Fed’s biggest rate hike since 1994 means millions more homebuyers may be priced out of the housing market: ‘Desperate times call for desperate measures’

Estimated read time 4 min read

Pity those first-time house buyers.

On Wednesday, the U.S. Federal Reserve raised the benchmark interest rate by 75 basis points to a 1.5% to 1.75% range, the biggest increase since 1994 as it tries to tame rising inflation, which has reached a 40-year high.

Eric Finnigan, a director at John Burns Real Estate Consulting, wrote on Twitter
that mortgage rates rising from 3% at the start of this year to 6% effectively rules out 18 million households from qualifying for a $400,000 mortgage.

On a $400,000 loan, a 30-year, fixed-rate mortgage at a 3% interest rate would cost homebuyers approximately $1,686 a month, excluding taxes and other fees. That equates to $607,110 in total (with $207,110 in interest).

Compare that to current rates: At 6% that same mortgage would cost approximately $2,398 a month ($863,353 in total with $463,353 interest), a 42% increase in overall monthly repayments on the lower rate.

“The old maxim ‘desperate times call for desperate measures’ appears to have come into play with this latest rate move,” said Mark Hamrick, senior economic analyst at Bankrate.com said in response to the Fed’s 75-basis-point hike.

“The cost of borrowing is becoming more expensive, particularly for those with variable rate products,” he said. Conversely, those who locked in at a 30-year rate last year at more than half the current rate will be breathing a sigh of relief.

The most recent rise in mortgage rates was baked into the expected 75-basis-point hike, but they say interest rates remain on an upward trajectory, saidHolden Lewis, home and mortgage expert at personal-finance site NerdWallet.

“The 30-year fixed-rate mortgage surged past 6% in the last week, its highest level since November 2008, when the economy was crawling out of the financial crisis,” he said. “The May inflation report provided the final shove.”

‘The Fed faced another difficult choice.’

— Ben McLaughlin, president of the online savings platform SaveBetter.com

The Fed faces a difficult balancing act: taming rapid inflation — running at 8.6% through May on the year through, according to the Consumer Price Index — without pushing gross domestic product growth into negative territory.

Rates won’t have reason to fall with inflation at these levels, Holden added. “Mortgage rates tend to go up and down in anticipation of Fed rate moves,” he said, adding that he doesn’t expect another dramatic spike in the weeks ahead.

About half of buyers are pressing pause on their plans to buy a home, choosing to wait for six to 12 months before restarting the process, according to a recent survey of 900 realtors by real estate tech startup HomeLight. 

That sentiment is showing up elsewhere. The Market Composite Index, a measure of mortgage loan application volume, fell to its lowest level in 22 years, the Mortgage Bankers Association (MBA) said earlier this month. 

CEO Glenn Kelman wrote in a blog post on Tuesday, in which he asked 8% of this company’s staff to leave, “With May demand 17% below expectations, we don’t have enough work for our agents and support staff.”

He said the business has had to downsize its staff as “mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive.”

Analysts were not surprised by the Fed move. Ben McLaughlin, president of the online savings platform SaveBetter.com, said it was fulfilling expectations with its third consecutive rise in the Fed Funds target rate since March 2022.

“The Fed faced another difficult choice,” McLaughlin said, adding that “markets have been rattled lately, so the Fed must walk a narrow path to avoid a jolt so pronounced that it risks tipping the U.S. economy into recession.”

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