What the Fed is going on with the Housing Market

Written by Joe Peres

Joe Peres is a Producing Sales Manager for Meadowbrook Financial Mortgage Bankers. He is leader of The Peres Team at Meadowbrook Financial Mortgage Bankers in Westbury, NY. Joe has nealry 2 decades of experience of helping first time home buyers achieve their dreams of home ownership and home owners refinance and achieve their short and long term financial goals. NMLS ID 3988

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First Time Home Buyer | Homeowners | Mortgage

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December 9, 2022

The chart below compares the maximum conforming loan limit for 1 -unit properties (loan limit) with average mortgage interest rate*, the Average Federal Funds Rate**, and the Average MDSP. MDSP is the Mortgage Debt Service Payments as a Percent of Disposable Personal Income***. This is a measure of the affordability of homeownership. It takes into account income, home prices, and mortgage payments to calculate a percentage.

Rates were at all time lows, almost everyone and their mother was refinancing to take advantage of it. Then… it stopped. March of 2022 mortgage rates increased by a whopping 65% to a national average of 4.42% [1]. The single largest mortgage rate increase in a 30day span in history. Many families dreams of home ownership were crushed this month. This rate increase raised a $540,000 mortgage loan payment by nearly $450 per month or $5400 per year a nearly 20% increase. This continued through the spring, summer and fall of 2022 peaking the national average mortgage rate at around 7.4% in October [2]. For comparison someone closing in January of 2022 with a 2.875% rate on $540,000 would have a principal and interest payment of around $2,240 per month and that same loan amount at 7.5% is around $3,775 per month. Thats more than $1500 per month, $18,000 per year, 70% more for the same exact house only 6 months later!

This begs the very simple question – Why? Why such a drastic change in such a short period of time. We’ll the reason is inflation. Whether it was actual inflation or artificial inflation is up for debate but the fact of the matter is the average consumer was spending more on just about everything [3] and the United State Federal Reserve had to get a handle on it before its quite literally got out of hand. The Fed uses among other measures the Consumer Price Index or CPI. An index is a method to track the performance of a group of assets. In this case consumer goods. So they fill a basket with common consumer goods and check the price of these each month. The inflation rate is calculated from this by subtracting the prior cpi from the new cpi and dividing by the prior cpi [7]. There are different flavors of this index and the one used for inflation is Core CPI. This calculates the consumer price index with food or energy and it is then compared to the previous year (YoY – Year over Year) and our inflation rate is calculated.

To do this the Fed used its tried and true method, Raise the Federal Funds Rate [4]. The Federal Funds Rate is the interest rate at which banks and large financial institutions borrow money at. As you can see in the chart below the Fed uses this as a throttle on the economy. The red boxes indicate recession and with each the Federal Funds Rate is lowered to spur the economy. But this time the Federal Reserve also employed increasing the unemployed [5]. With a target of eliminating 1,300,000 jobs and a single goal of decreasing demand to drive prices down.

This is not the first time the Fed is using these tactics. As seen by the chart below the Federal Reserve raises the Federal Funds rate with each looming recession with the exception of 2020. During the recession of the early 1980s the Fed drove the unemployment rate all the way to over 10% [6] which the economy did recover from but painfully.

With the increased cost of borrowing money and the newly unemployed the Fed hoped to slow the economy to the brink of a recession. When the Federal Funds Rate is increased that doesn’t just affect mortgage rates. It affects all types of borrowing from credit cards to car loans to personal loans or any other transaction of this type. And in October 2022 it seemed as though their efforts were starting to show. The CPI or Consumer Price Index lowered for the first time since the rate hikes began.

But how can our government do this to us you ask? Without proper intervention from the government inflation can run rampant creating Hyper Inflation. Hyper Inflation can destroy nations by making the price of necessities out of reach for the everyday people as seen in countries like Zimbabwe[8] and Venezuela [9]