Housing Market Nightmare Is About to Get Worse

The Federal Reserve on Wednesday opted not to increase interest rates again as has been previously customary to offset record amounts of inflation, though loan borrowers with poor credit scores could still feel the volatility in what remains a competitive housing market.

Rate stabilization will stay from 5 percent to 5.25 percent, ending a streak of 10 consecutive .25 basis point increases as the Fed and Chair Jerome Powell set out a goal to bring inflation down to 2 percent. The current U.S. rate of inflation sits at 4.05 percent, compared to 4.93 percent last month and down nearly double compared to this time last year (8.58 percent).

Lawrence Yun, chief economist at the National Association of Realtors, said he expects further deceleration in the coming months due to wage growth outpacing consumer price inflation—and, in effect, the average standard of living.

It also could lead the Fed to stop interest rate increases, and potentially even slash rates, by the end of this year or by early next year, he added. While 30-year mortgage rates have hovered around 7 percent recently when they are typically between 5.5 and 5.7 percent, he views the potential for a decline as “real.”

“Some prospective buyers will try to enter the market now rather than later,” Yun told Newsweek. “Therefore, expect a slight uptick in multiple offers.”

Powell, however, said he doesn’t expect rate cuts for at least another two years.

That could further exacerbate the current market and prevent people from selling homes due to their already low, stabilized interest rates—while also encouraging some to jump into the buyer’s market to potentially attempt to avoid higher rates down the line.

Also, it keeps purchasing power low due to a lack of supply, leading to more offers and heightened competition with all-cash buyers.

“It will be appropriate to cut rates at such time as inflation is coming down really significantly,” Powell said, according to CNBC. “And again, we’re talking about a couple of years out.

“As anyone can see, not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate.”

Banks are also tightening their lending standards. Individuals with below-average credit are finding it more difficult to get approved not just for mortgages but also car loans.

Tighter money will hit borrowers with credit scores on the edge of qualifying for certain loans, Spencer Betts, certified financial planner at Bickling Financial Services in Lexington, Massachusetts, told The Wall Street Journal. Tens of millions of Americans reportedly have FICO scores, which range from 300 to 850, below 800.

“If you have good credit, good cash flow, good [debt-to-income ratio], you won’t be affected” by tighter standards, Betts said.

Those with credit scores above 780 usually receive the most favorable interest rates.

Quarterly data issued by consumer credit reporting company Experian showed that the overall average auto loan interest rate was 6.58 percent for new cars and 11.17 percent for used cars in the first quarter of 2023, according to NerdWallet.

Greg McBride, chief financial analyst at Bankrate, told MSN that the increase in mortgage rates compared to last year plus a major two-year rise in housing prices are a cause for concern for potential homebuyers. The prices are higher and so is the financing, he said.

“With core inflation stubbornly high, we’re unlikely to see material improvement in mortgage rates even if the Fed doesn’t raise interest rates further,” he said. “The phrase ‘higher rates for longer’ most certainly applies to mortgage rates.”

Jeffrey Roach, chief economist for LPL Financial in Charlotte, North Carolina, said in a statement that the current Fed outlook is reminiscent of 2007 before the housing market crashed.

“This current environment could be eerily similar to early 2007 when the Fed held a tightening bias on rates as they believed the housing market was stabilizing, the economy would continue to expand, and inflation risks remained,” Roach said. “Clearly, those expectations were not met since we know what happened in later quarters. Investors should anticipate some volatility during these months where the economic outlook remains cloudy.”

Concerns over commercial real estate are also panicking investors like Jeff Greene, who made a lot of his wealth during the 2008 recession and has warned about a destructive period across the entire real estate market.