The Fed’s monetary tightening policy has pushed mortgage rates to their highest level since 2001 — and they could keep going higher.
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“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.
“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 7.23% the previous week, its highest level since 2001, according to housing giant Freddie Mac.
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 in September, 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.
Applications for home purchase mortgages have plummeted to their lowest level since April 1995, according to the Mortgage Bankers Association (MBA).
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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