At the end of April, the Bureau of Labor Statistics reported that the Consumer Price Index measured year-over-year inflation at 8.5%. The Consumer Price Index is a calculation that tracks how much the average cost of consumer items changes over time and is a widely used method of measuring inflation.

Like most consumers, you’re probably concerned about the continued reports of increasing inflation, and likely feeling the brunt of these growing numbers. You can see the increase in overall price levels at the supermarket buying groceries, filling up on gas, or in your monthly energy bills.

The Federal Reserve, which is charged with navigating US financial policy, is working to address those concerns and stomp out this continued inflation. Raising the federal funds rate is a tried-and-true economic lever they can pull to help counteract inflation.

One concern is how inflation and increasing rates will affect bigger-ticket purchases, like cars or homes. If you’re in the market to buy or sell a home, you’re probably also concerned with how this is affecting mortgage rates and the housing market. In this post, we explain the most recent Fed rate increase that happened this month, how it’s affecting the real estate market, and the current outlook for the rest of the year.

Why is the Fed Raising Rates Again?

If you’ve been keeping up with financial news, you’ll remember that the Fed just raised the federal funds rate by 0.25% in March. So, you might be wondering why there was already another rate increase in May.

While the previous rate increase did affect some parts of the economy, it’s not reaching other parts of the economy as quickly, such as the pricing of household consumer items.

As the Federal Open Market Committee (FOMC) continues to meet throughout the year to review the rate of inflation and other indicators of the health of our economy, they will continue to make the adjustments needed to provide stability and prevent worsening economic conditions.

As part of the review process that took place on May 4, the Fed hiked rates by 0.5%. This new rate dictates how much banks must pay to borrow funds, which can, in turn, impact the interest rates those same banks offer to consumers for many types of loans.

How the Rate Hike is Affecting Interest Rates

The 0.5% Fed rate hike does not mean that interest rates for consumer loans like mortgages and cars just also increased by 0.5%.

In fact, the Fed’s rate increase is meant to curb inflation, which is what has caused mortgage interest rates to go up. When inflation increases, it decreases the long-term value of a 30-year mortgage, which means the rates for those mortgages have to move higher to value them more appropriately.

How the Fed Rate Increase is Affecting Home Sales

Some buyers might be worried about the rise in mortgage interest rates. But you should keep in mind that interest rates are only one part of the equation for home affordability.

Home prices will also fluctuate as changes in demand play out. While you may be quoted a higher interest rate for your loan compared to this time last year, that could potentially be offset by a lower purchase price. The most important thing you can do is stay connected with your real estate agent and loan officer, so that you can adjust your budget and home search as needed.

What to Expect for the Rest of 2022

Since inflation has risen dramatically over the past year, it will take time to reverse that and stabilize parts of the economy. That’s why the Fed is spacing out these rate increases throughout the year.

This ensures that the data can be collected and analyzed, and that careful consideration can be given before any rate changes are enacted.

While many economists are confident that inflation can drop to a more manageable percentage by the end of 2022, most also agree that more rate increases will be needed to get there.

The silver lining is that each time they’re helping to correct the high rate of inflation we’ve all been experiencing, which is ultimately a good thing for everyone.

Whether you’re buying or selling a home, or just considering your options for an upcoming real estate transaction, our team of mortgage experts are always happy to discuss market changes. They can help you navigate the Fed rate increase and explain how it might affect your loan options. Reach out to an FHM loan officer today for a free consultation.

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