Chicago’s First-Time Home Buyers Are Squeezed Out By Fed

Prolonged interest-rate tightening by the Federal Reserve Board is like a junk-yard dog on the pant legs of prospective first-time home buyers who continue to collect apartment rent receipts.

Home-loan interest rates “could linger at around 6.5% for a few more months before heading below 6% by summer and maybe even 5.5% by the end of the year,” said Lawrence Yun, chief economist for the National Association of Realtors, in a recently revised forecast.

An earlier more optimistic forecast by the Mortgage Bankers Association (MBA) predicted 30-year fixed mortgage rates will decrease to 5.6% in the second quarter of 2023, then ease to 5.5% in the third quarter, and 5.2% by year’s end.

The MBA’s 2024 forecast predicted that 30-year rates would slip to 4.7% by the second quarter of next year, and an affordable 4.4% by the third and fourth quarters.

If the Fed keeps tightening the screws, that scenario is unlikely to happen.

Fed Chairman Jerome Powell told a Senate panel last week that evidence continues to point to a robust economy and persistently high inflation.

Powell’s comments raise the possibility that the Fed will increase its key federal funds interest rate by a half-percentage point on March 21-22, its next meeting. The funds rate currently is 4.5% to 4.75%. The Fed previously raised its benchmark rate by a half-point in December, and imposed four three-quarter point hikes before that.

When the key short-term rate is raised, it typically leads to more expensive mortgages, and higher interest charges on auto loans, credit cards and business loans. Higher rates can cool the economy and inflation, but they also spark the risk the nation will fall into a recession.

On March 9th, Freddie Mac’s Primary Mortgage Market Survey reported that benchmark 30-year fixed home loans rose to an average of 6.73% nationwide, up from 6.65% a week earlier. A year ago, the 30-year fixed loan average was 3.85%.

“Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy,” said Sam Khater, Freddie Mac’s chief economist.

“Overall, consumers are spending in sectors that are not interest-rate sensitive, such as travel and dining out,” Khater noted. “However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be buyers continue to face the compounding challenges of affordability and low inventory.”

On March 9th, the Freddie Mac survey also reported that 15-year fixed mortgages averaged 5.95%, up from 5.89% a week earlier. A year ago, the 15-year fixed home loan average was 3.09%.

The survey is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit.

Borrowers who shop around may find better deals. For example, on March 9th, Mutual of Omaha was quoting 6.399% on 30-year fixed loans with a 20% down payment and a loan fee of $850.

“Higher interest rates and historically low inventory continue to be the major obstacles keeping buyers and sellers on the sidelines,” noted Realtor John Irwin of Baird & Warner in his March 2023 Chicago Market Analysis.

“If move-up purchasers can find a home to buy with the current low inventories, many would be trading a 3% existing mortgage interest rate on their current to home for a 6.5% rate on their new home,” Irwin said.

Higher mortgage costs are not the only problem for first-time home buyers. “Stubbornly high and rising apartment rents are keeping consumer prices elevated,” Yun said.

For example, in January of 2023, tenants renting apartments and single-family homes nationwide paid 8.6% more in rents this year versus 12 months ago, Yun said.

“Moreover, the monthly change was 0.7% of 1 percentage point, or 8.8% on an annualized basis,” Yun said. “That was a big contributor to the overall consumer price inflation running at 6.4%, and well above the comfort level of 2% inflation.”

For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.