What to Expect with Higher Interest Rates and Inflation

Blog November 22, 2022 by Lori Murray

Interest rates on 30-year fixed mortgages, the most common type in the United States, have increased to around 7 percent. It is expected that the Federal Reserve, or Fed, will raise interest rates another 0.75 percentage points next month, with more increases likely to follow in 2023. With these increases, the Fed is attempting to combat inflation, an economic condition in which prices rise and money lowers in value.

Recent world events, specifically Coronavirus and the Ukraine war, have severely disrupted global supply chains. Inventories of all consumer and business products, including food, gasoline, automobiles, and appliances, are all reduced. At the same time, demand has remained unchanged. Given the law of supply and demand, prices are bound to go up. As a result, workers want higher wages in order to pay the higher prices, and there is a possibility of an inflationary spiral that reduces everyone’s purchasing power.

The Fed is attempting to “cool off” the economy by increasing interest rates to control price growth thereby reducing overall demand for goods and services. When consumers are not making purchases, and demand decreases, businesses and companies scale back production, which sometimes involves laying off employees, leading to an increase in unemployment.  

The goal of the Fed is to balance supply and demand, so that prices stabilize. However, there is a thin line between achieving this goal and pushing interest rates so high that they choke off business demand to an extreme that leads to an economic recession – an outcome that negatively affects everyone. Consumers feel the effect of higher interest rates most noticeably when trying to buy a house. A year ago, a 30-year fixed mortgage could be secured at a rate of around 3.75%. Today, rates are nearing 7%, impacting the cost of a mortgage.

What does this mean to home buyers, whether first-time or those looking to move and take advantage of the softening market? We often see that buyers negotiate with the seller for a lower price, or they may decide to hold off until rates fall. When interest rates rise, the demand for homes falls to some degree, and home prices tend to decrease as well so patience and strategy are key to home buying decisions. It is also important to note that while interest rates are undeniably rising, this is a rise in response to historically low interest rates seen in 2020 and 2021. While interest rates have increased, they are increasing from the lowest point in the past 40+ years.

There are options for buyers despite the concern over rising interest rates. One option includes the ability to lock in a mortgage rate once approved for a loan. This allows a buyer to look for a home without the stress or impact of changing interest rates and looming Fed increases. Typically, a mortgage rate can be locked in for up to 60 days. There is also the option to purchase mortgage points at the close of escrow, which reduces the interest rate. In this scenario, it is important to consider your goals - will you be in this home for a period of time that outweighs the breaking point needed to make this strategy beneficial? Rising interest rates can be challenging but can also induce lower home prices, providing a balance of investment versus cost paid for a mortgage. The best strategy is to work with qualified lenders who can support your goals and analyze your financial needs.

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