As far as the Federal Reserve is concerned, 2023 has started on a good note. Inflation has declined, wage growth has slowed and consumer spending is cooling. These are indications that its tightening monetary policy has had the desired effect and we may be able to avoid a recession. The Federal Reserve’s decision to increase the federal fund rate by a quarter point, the smallest increase since March, indicates its belief that the economy is on the right track – but not there yet.
The Fed began increasing interest rates last year to slow the economy and dampen the red-hot housing market. The housing market was directly impacted by the increase in rates. Builders stopped building, sellers stopped selling and buyers stopped buying. Housing sales volume plummeted, but at the end of 2022 housing prices were at their highest level, with a median national price point of $370,000.
The Fed’s impact on the economy was also mixed. The Fed is operating under the principle that inflation can not be curtailed if wages continue to increase at an accelerated pace. Paying workers more increases a company’s overhead which is passed on to consumers at higher prices. Even though pay rates and price hikes are slowing, they are still high. Since 2021 wage growth was at a 5% yearly rate. So far this year it is tracking at a 4.2% yearly rate. Inflation is down but still above 4%, and not yet close to the targeted 2% rate. While the Fed’s policies have brought gas and used car prices down, groceries and rents have continued to increase.
Increased interest rates are increasing the cost of doing business, but the job market remains strong. Joblessness is historically low at 3.5% and jobs are continuing to be added to the market. In 2022, 4.5 million jobs were added to the economy. This is good news and bad news. One of the Fed’s biggest concerns is slowing the economy without job loss. The bad news is that a tight job market can lead to inflation.
Many investors see the smaller increase in rates as a positive sign, which may have a positive effect on the housing market. The Fed does not directly set mortgage rates, but investors view its policies as indicators of the economy’s strength and direction. Even as the fed fund rate is increasing, the average rate on a 30-year fixed-rate mortgage has dropped from its high of 7.12% to 6.2%. Home prices have begun to stabilize in some markets and many banks predict that interest rates could decrease to 5% by the end of the year.
If you would like to learn more about current mortgage options or trends in the housing market, please get in touch. Our agents can help you decide if this is the right time to buy, sell or invest.