Chicago Borrowers Riding A Rocket As Rates Head For Stars
The “warp speed” mission of the Star-Trek Enterprise is the best way to describe mortgage-rate hikes that have impacted the Chicago housing market over the past year.
Comparing a 14-month period in 2022-2023 to the previous 35 years, an analysis of recent Federal Reserve Board (Fed) actions shows that interest rates have skyrocketed 4.88%. That’s faster than in any other time in recent history.
Over the past year, Fed chairman Jerome Powell—the economy’s Captain Kirk—has aggressively raised the federal-funds rate to fight inflation. On May 3rd, the Fed raised its funds rate a quarter of a percentage point to a range of 5% to 5.25%. The effective rate is a weighted average of interest banks charge to lend money to each other overnight.
Here is the Fed’s 35-year analysis of the most rapid federal-funds rate shifts since 1988:
Rates skyrocketed 4.88% in the 14-month period between March of 2022 and May of 2023.
Interest charges zoomed 3.96% in the 24-month window between June of 2004 and June of 2006.
Rates spiked 3.23% in the 14-month period between March of 1988 and May of 1989.
Interest charges rose 2.67% in the 12-month window between February of 1994 and February of 1995.
Rates slowly inched upward 2.03% in the 36-month period between December of 1988 and May of 1989.
The Fed’s relatively mild quarter-point rate hike on May 3, 2023 was influenced by a variety of factors based on how select indicators have shifted since the first hike in March of 2022.
The following numbers show how the Fed has started to win the battle to control inflation between March of 2022 and March of 2023:
The year-over-year inflation rate fell from 6.8% to 4.2%.
Annualized Gross-Domestic-Product growth plummeted from 7.0% to 1.1%.
Over-the-month change in employment declined from 414,000 new hires in March of 2022 to 236,000 jobs added in March of 2023.
So, the statistics show that economic growth slowed significantly over the past year, but inflation still is above the Fed’s 2% target.
However, analysts say “turbulence in the banking sector” caused by recent bank failures also is cause for concern, as tighter credit conditions will likely weigh on economic activity.
The only good news for prospective home buyers is the Fed may have temporarily pressed the pause button on future interest-rate hikes. Recently, Powell said the Fed would “determine the extent to which additional policy firming may be appropriate.” Earlier statements over the past year always forecasted future rate hikes.
Home-loan rates now at 6.39%
On May 18th, the Freddie Mac Primary Mortgage Market Survey reported that average benchmark 30-year fixed home loans nationwide eased slightly to 6.39% from 6.35% a week earlier. A year ago, the 30-year loan average was 5.25% Fifteen-year fixed mortgages averaged 5.75% on May 18th, unchanged from a week earlier. A year ago, the 15-year loan average was 4.43%.
The survey is focused on conventional, conforming, fully amortizing home-purchase loans for borrowers who place a 20% down payment and have excellent credit.
Borrowers who shop around may find better deals, according to Rate Seeker.com. For example, on May 19th, First Savings Bank of Hegewisch was quoting 5.832% on 30-year fixed rate home loans with a 20% down payment. The bank charges a loan origination fee of $615.
On May 19th, Mutual of Omaha was quoting 5.922% on 30-year fixed loans with a 20% down payment and a loan origination fee of $850. Fifteen-year fixed mortgages are available at 5.375% with 5% down and an $850 loan fee.
“Economic crosscurrents have kept rates within a 10-basis-point range over the last several weeks,” noted Sam Khater, Freddie Mac’s chief economist.
“After the substantial slowdown in growth last fall, home prices stabilized during the winter and began to modestly rise over the last few months,” Khater said.
“This indicates that while affordability remains a hurdle, home buyers are getting used to current rates and continue to pursue homeownership,” Khater said.