Mortgage rates are about to climb sharply again, which means buying a house at the median California price of around $900,000 could cost hundreds of dollars more each month.
Credit card interest rates are also likely to increase. Ditto for car loans. And the state’s economy is likely to feel the heat as it slows due to all the interest rate spikes.
That’s the forecast of many economists as they prepare for anticipated hike in key rates by the Federal Reserve this week. Its upside should be 0.75 percentage points, maybe even a full percentage point, in the federal funds target ratewhich largely dictates the evolution of interest rates.
The increase, which is expected to be announced on Wednesday, comes six weeks after a 0.75 percentage point rise, the largest single jump since 1994.
The increases are intended to slow the rate of inflation. In the 12 months to June, prices rose to their fastest pace since late 1981. Higher interest rates tend to relieve demand for goods and services, prompting suppliers to keep prices stable or lower in order to continue attracting customers.
Experts told The Bee they expect this will mean a slowdown in economic activity.
It’s what the Fed calls a “soft landing,” said Paul Single, San Francisco Bay Area-based senior economist at City National Rochdale, an investment management firm. This is when the economy slows enough but does not cause a recession.
Single, who also prepares economic reports for the California Chamber of Commerce, said the effect of rising short-term interest rates takes 12 to 18 months to show.
The Fed wants inflation to come down quickly, Single said, but based on the data, that won’t happen as quickly as it wants. This means that the Fed must continue to raise rates.
“Higher interest rates are like a tourniquet on the state economy, and the pain has already started,” said Sung Won Sohn, president of SS Economics in Los Angeles.
How much will prices increase?
Here are the prospects:
▪ Houses. The average mortgage interest rate last week was 5.54%. This meant that for a $900,000 home, the median price in California, the cost of principal, interest, taxes and insurance meant a monthly payment of $5,141. This assumes a 20% down payment.
“Overall, the real estate market in California is really stuck between a rock and a hard place,” said Kyle Clark, investment adviser at Gerber Kawasaki, a California-based financial planning firm. He cited that rates are rising and there hasn’t been a dramatic drop in house prices.
Although the Fed’s increase does not automatically translate to a specific mortgage interest rate, let’s assume the rate increases by three-quarters of a percentage point. That would push it to 6.29% and increase the monthly payment by $346, according to Jordan Levine, vice president and chief economist at California Association of Realtors.
If the rate increased by one percentage point, homebuyers would pay $464 more than current levels.
Jacob Channel, senior economist at LendingTree, an online lending marketplace, pointed out that while mortgage interest rates in the range of 5% to 7% are still not high by historical standards, consumers are feeling more of pain because housing prices have also increased in recent years.
As a result, he said, “a lot of people are pulling out of the housing market.”
Clark said mortgage applications had “fallen off a cliff”. He said he thinks people got used to last year’s low interest rate environment where they could buy a house for 2.5%. Now interest rates have doubled, he said, and are causing people to reassess whether they want to embark on a long-term investment.
▪ Credit card. “These rate increases are really adding up for credit cardholders, and all signs indicate the Fed isn’t stopping anytime soon,” said Matt Schulz, chief credit analyst at LendingTree.
“That means that even though credit cards (interest rates) are about as high as they’ve ever been, your credit card debt is only going to keep going up in the months to come. unless you act,” he said.
It also had this warning: the rate you pay on the current balance will increase, usually within one or two billing cycles.
“That’s a pretty scary fact for people struggling with credit card debt,” he said.
▪ Car loans. Car dealerships face two huge problems. Rising rates are one, but the other involves continued supply shortages.
“People who need a car are hit with a double whammy,” Channel said.
Single of City National Rochdale said rates on a car loan are currently around 5.2%, adding that this is a significant increase from December, when it was 3, 5%.
However, the average long-term rate from 2000 to today is 5.25%.
“So yes, the rate has gone up, but it’s not at an onerous level,” Single said. “It’s one we’ve seen before.”
The car issue has a disproportionate effect on low-income people. Unlike housing — where people who can’t afford a house can rent or add a roommate — people who need cars have few alternatives other than public transport.
A rate hike by the Fed this week would be its fourth hike this year, after keep the rate close to zero throughout the COVID-19 pandemic. The quarter-percentage point increase in March was the first in more than three years, and two more followed this spring, bringing the rate back to its current range of 1.5% to 1.75%. The Fed has signaled that there may be three more increases this year.
This story was originally published July 26, 2022 5:00 a.m.