Interest Rates Definitely Affect Market

Real Estate Broker/Owner with Warm Weather Real Estate AZ BR558423000

The Federal Open Market Committee (FOMC), a branch of the Federal Reserve Bank (Fed), met July 27, 2022, in one of eight yearly meetings, agreeing to raise the Federal Reserve interest rate by .75% to 2.5%.  The main reasons for the rate increase are to fight inflation and to slow job growth, wage increases.  This Fed interest rate is projected to increase at least .25% in each of the three remaining meetings this year.


Many loan rates are calculated by the Fed rate.  Prime lending rate - the rate banks charge each other - is the Fed rate plus 3.0% to 3.5%.  The thirty year mortgage rate charged by a bank is the Fed rate plus 2.75% to 3.25%.  While the 5/1 variable mortgage bank rate is the Fed rate plus 1.0% to 3.0%


At the same time the Fed increased their rate, according to Freddie Mac, the 30 year fixed rate mortgages dropped 17 basis points to 5.59%, reflecting an already softening demand for loans due to previous rate and home price increases. The open market determines rates for Federal Home Loan Mortgage Association (FHLMC), Freddie Mac; and for Federal National Mortgage Association (FNMA), Fannie Mae loans.  


Here in Arizona, we have noticed across the board price reductions in the last two weeks, particularly in the first time buyer market.  It’s either due to the same factors Freddie Mac indicates, or because of the lower seasonal demand in Arizona.  Lots of Arizonans are gone for the summer, at least until the temperatures drop.  Some neighborhoods experience vacancy rates up to 70% during the Monsoon Season. 


Regardless of the seasonal effect, many first time buyers are priced out of the market through the combination of price and rates.  This definitely puts pressure on the market to decrease rates.


In measuring the inflation increases, the government uses the Personal Consumption Expenditure (PCE) Index.  This shows them, across the board how prices for goods and services in the United States fluctuates month to month.  PCE is not the same Consumer Price Index.


Interestingly enough, the only real estate price changes reflected in the government indices, are commercial real estate and home rental rates paid by tenants.  Home prices are not involved, because the government considers homes as an investment.


So the increase in home prices is not part of this 9.0% inflation calculation…that may be a good thing.  How high would that inflation rate have gone?

Comments (2)

Richard Weeks
Dallas, TX
REALTOR®, Broker

Great information, thanks for sharing.  I hope you have a great day.

Jul 30, 2022 02:30 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Bob, I do believe many buyers thought 3.25% would be the normal, but not so! 

Jul 30, 2022 06:07 AM