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Mortgage rates could soon top 7% as Fed fights inflation

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Average interest rates on the most popular U.S. mortgages could soon exceed 7%, reaching their highest level since the early 2000s, according to Bank of America strategists.

In an analyst note obtained by FOX Business, bank economists predicted borrowing costs will continue to rise as a result of the financial crisis. federal reserveFighting inflation and a worsening housing shortage.

The Fed has already plunged the housing market into recession and is raising interest rates most aggressively in decades, but mortgage rates have repeatedly increased.

average rate of 30 year fixed mortgage Recent data from mortgage firm Freddie Mac showed it surged to 6.29% in the week ending Sept. 22 after the recent Fed rate hike. This is significantly higher than just a year ago when interest rates were his 2.88%.

How housing is driving rampant inflation

A for sale sign is displayed in front of a property in Monterey Park, CA on August 16, 2022. (Photo by FREDERIC J. BROWN/AFP via Getty Images / Getty Images)

housing account About one-third of the Department of Labor’s consumer price index. This is a worrying development. Shelter costs rose again in August, up 0.7% from the previous month and 6.2% from the previous year. This is his fastest pace since February 1991.

“The Fed’s handling of inflation is definitely getting worse,” said Chris Flanagan, managing director at Bank of America and head of U.S. mortgage, structure and finance research.

housing market

Homes in Harris Ranch Community, Boise, Idaho, July 1, 2022. (Jeremy Erickson/Bloomberg via Getty Images/Getty Images)

Flanagan said the Fed will have no choice but to raise interest rates further as rents and housing costs continue to rise.

U.S. house price gains slowed in July at fastest pace since 1980s

This, combined with already high home prices, has spurred an increase in owner equivalent rent, a data point that measures how much a homeowner would have paid in rent if they hadn’t purchased the home. . market.

With a rent vacancy rate of 5.6%, the lowest level since 1984, owner equivalent rents may continue to be a problem for central bankers, according to BofA strategists.

Federal Reserve Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell arrives to speak at a post-meeting press conference of the Federal Open Market Committee (FOMC) in Washington, DC, Wednesday, Sept. 21, 2022. (Photo by Sarah Silbiger/Bloomberg via Getty Images/Getty Images)

“There is no quick fix to the supply problem. The main ‘solution’ available to the Fed is to crush demand, which means crushing jobs,” Flanagan said. “The Fed has been slow and reluctant to embrace this solution, but as this week’s revision to BofA Economics’ forecasts for rate hikes suggests, it is getting there.”

The interest rate-sensitive housing market has started to cool significantly in recent months. federal reserve There is a move to tighten policy at the fastest pace in 30 years to cool consumer demand and curb hyperinflation.

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Pending home sales fell for the third straight month in August, down 2% from July, according to the National Association of Realtors.

Lawrence Yun, NAR’s chief economist, said, “Mortgage interest rates are the driving force behind home purchases, and the highest interest rates in a decade are having a serious impact on contract signings.

Policy makers have already raised the benchmark federal funds rate five times in a row, including three consecutive increases of 75 basis points.

Fed Chairman Jerome Powell said last week that the housing market likely “needs to go through an adjustment to return to a better balance.”

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