Oct 4, 2023
The Fed’s monetary tightening policy pushed mortgage rates in late September to their highest level since 2000 — and they could keep going higher.
“There's a real issue as to whether we've broken the housing market,” Mohamed El-Erian, Chief Economic Advisor at Allianz, told CNBC on Aug. 28.
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“When you go from record-low mortgage rates to levels we haven’t seen for almost 20 years, you destroy both the demand and supply.”
High mortgage rates
The average rate on the 30-year fixed home loan clocked in at 7.31% on Sept. 28, its highest level since 2000, according to housing giant Freddie Mac.
In the week previous to El-Erian’s comments, the average rate hit 7.23%, which at the time Freddie Mac said was the highest it had been since 2001.
The federal funds rate was last raised in July to the 5.25% to 5.5% range, and there’s a possibility the Fed could implement another hike when officials meet again Oct. 31-Nov. 1, potentially driving mortgage rates even higher.
“We’ve got to be really careful,” El-Erian warned. “The housing market is central to the economy.”
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Buyers and sellers at a standstill
El-Erian says high mortgage rates have tamped down housing supply and demand, with many buyers priced out of the current market and sellers reluctant to let go of the cheap mortgage rates they secured in the early years of the COVID-19 pandemic.
The median home sale price also climbed 1.7% year-over-year to $421,872 in July, according to Redfin — just 2.5% behind the record high of $432,476 set in May of last year.
In the week of Aug. 18, applications for home purchase mortgages plummeted to their lowest level since April 1995, according to the Mortgage Bankers Association.
The Fed wants to bring inflation down to 2%
Fed chair Jerome Powell says he’s determined to bring inflation down to 2%, but doesn’t see it cooling to that level until 2025.
"The key issue: is 2% the right target?” asked El-Erian, who also suggested there’s a real possibility Americans could simply end up living with a stable inflation rate of over 2%.
“What we're looking at right now is a possibility that headline inflation will head back up,” El-Erian added.
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Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.
