Fed’s latest rate hike puts more home buyers on shaky ground

The Federal Reserve last week
logged its biggest increase in the nation’s benchmark interest rate since
1994, bumping it 75 basis points to a range of 1.5%-1.75% to combat

A housing market that had

been on fire

during 2020-2021 now looks significantly different — and more daunting — to
prospective home buyers on the hunt in 2022.

Mortgage rates that hovered around an appealing 3% at the beginning of the
year are now hovering near 6%.

During the week ending June 16, the popular 30-year fixed mortgage rate
shot up 55 basis points from the week prior, averaging 5.78%. It was the
single biggest one week increase since 1987. A sharp selloff in mortgage
securities had

pushed rates past 6% earlier last week
, changing the outlook of demand among home buyers in markets across the
United States.

It’s expected that the increase in mortgage rates in June was already
factored into the Fed’s interest rate hike. There may not be another
imminent spike in mortgage rates, but they are likely to continue to climb
this year.

What this means for home buyers is starkly illustrated by basic math.


shared the following example last week:

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 the current environment: 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

Home affordability is

waning for a large segment

of the U.S. population, particularly first-time home buyers who don’t have
the resources to afford the rising prices of homes and the mortgage
commitments attached to them.

For most of the pandemic, the affordability problem was driven by low home
supply. With lower mortgage rates, many buyers could get past this. Now,
they’ll have to hope that weakened demand will soften home prices.

“Less demand for housing could help to alleviate some of the housing supply
crunches that are being felt across the country,” Jacob Channel, senior
economist at Lending Tree, told Marketwatch. Though it’s unlikely that home
prices will majorly slump, an increase in housing supply will likely
significantly slow home price growth and give would-be buyers more housing
options to chose from.”

Sales of existing homes dropped by 3.4% in May, the weakest they have been
since June 2020 as the housing market was finding its footing after the
initial pandemic lockdown period.

Still, the median sale price for a house in May was $407,600, up 14.7% from
May 2021. That’s not the kind of trend home buyers want to see in an
environment with rising mortgage rates. What’s worse, lower-priced homes
continue to be in short supply. In May, sales of homes priced between
$100,000-$250,000 dropped 27% from the previous year,


reported. The share of first-time buyers among all transactions dropped 4%
annually in May to 27%.

Danielle Hale, chief economist at, described the current state
of the housing market as a necessary “reset” after the frenzy of the last
two years. But in the short-run, the Fed’s activity and the impact of
higher rates will create a confusing and more unpredictable situation for

“While the rebalancing is needed, it’s upping the challenge of navigating
the housing market for both sellers and buyers as expectations and
conditions are adjusting rapidly,” Hale told


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