While we were busy with the election and its aftermath, U.S. mortgage interest rates had been steadily climbing. From 6% in September when the Federal Reserve began to cut interest rates, they have risen a full percentage point in the last four months.
The 30-year fixed mortgage was 7.04% in the week ending January 16. It was the fifth consecutive week of rate hikes and the highest level since May.
Did the Fed cut the interest rate too soon? That's what many economists are asking as residual inflationary pressures continue to make buying a house extremely difficult.
It's not just surging interest rates. There's a serious housing shortage in many areas, and getting home insurance in some localities is next to impossible because premiums are skyrocketing.
Yes, we can blame Biden's inflationary policies for most of this, but the fact is that there's been a housing shortage that predates Biden. As states pile more and more regulations on home builders and homeowners, building an affordable house doesn't make sense.
“The underlying strength of the economy is contributing to this increase in rates. Despite rising rates, Freddie Mac research highlights that consumers can save money if they shop for several different lender quotes,” said Sam Khater, Freddie Mac’s chief economist, in a release.
“We have an affordability crisis, a housing shortage, and for the first time in my lifetime, parents feel the American dream is slipping away from their children,” said President-elect Donald Trump's nominee for treasury secretary, Scott Bessent, during his confirmation hearing.
Some homeowners who had locked in a low mortgage rate before the Fed began to hike interest rates in 2022 have finally thrown in the towel and decided to sell, despite the fact that their new mortgage rate will be higher. That has contributed to the uptick in housing inventory. NAR chief economist Lawrence Yun has said life events such as marriage, divorce and new children eventually force homeowners to sell.
But that phenomenon — known as the lock-in effect — might not come undone a whole lot this year, according to economists. That means persistent housing shortages could continue to push up prices. To make matters worse, persistently elevated borrowing costs could also pump the brakes on the pace of home construction.
“Rates were abnormally low for the better part of 15 years, and they’ve been abnormally high for the last two,” said Greg McBride, chief financial analyst at Bankrate. “They’re coming down, but where they’ll settle out is going to be a level that’s higher than what we had seen before 2022.”
The Fed has reduced its expected rate cuts from four half-point cuts to two. That's not going to grant much relief to mortgage shoppers, but it may ease some consumer credit for bank cards and auto loans.
Going forward, annual percentage rates aren’t likely to improve much more. McBride predicts that the average APR on a credit card will fall to 19.8% by the end of 2025, down about half a percentage point from where it stands now.
Cardholders usually see the impact within a billing cycle or two. But for those carrying a balance from month to month, “borrowers need to press on with debt-repayment efforts,” McBride said. Rates “won’t be coming down quickly enough to provide meaningful relief.”
There's better news for auto loans.
Five-year new car loan rates are expected to fall to 7% from 7.53%, while four-year used car financing costs could drop to 7.75% from 8.21% by the end of the year, according to McBride.
Trump will spend the first 18 months of his presidency digging the economy out of the hole Biden put it in.
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