Mortgage rates are poised to jump sharply again, which means buying a home at the median California price of about $900,000 could cost hundreds of dollars more each month.
Credit card interest rates are also likely to rise. Same with car loans. And the state’s economy is likely to feel the heat as it slows because of all the interest rate spikes.
That’s the forecast of many economists as they brace for the Federal Reserve’s anticipated increase in key interest rates this week. Its hike is expected to be 0.75 percentage points, possibly even a full percentage point, in the target federal funds rate, which largely dictates trends in interest rates.
The increase, expected to be announced Wednesday, comes six weeks after a 0.75 percentage point increase, the biggest single jump since 1994.
The increases are aimed at cooling the rate of inflation. Over the 12 months ending in June, prices were up at their steepest pace since late 1981. Higher interest rates tend to ease demand for goods and services, spurring providers to keep prices stable or lower in order to keep attracting customers.
Experts told The Bee they anticipate that will mean a slowdown in economic activity.
It’s what the Fed calls a “soft landing,” said Paul Single, senior economist based in the San Francisco Bay area at City National Rochdale, an investment management firm. It’s when the economy slows down enough but doesn’t cause a recession.
Single, who also prepares economic reports to the California Chamber of Commerce, said the effect of increasing short-term interest rates takes 12 to 18 months to show.
The Fed wants inflation to decline quickly, Single said, but based on data, it’s not going to happen as quickly as it wants. This means the Fed has to continue to raise rates.
“Higher interest rates are like a tourniquet on the state’s economy and the pain has already begun,” said Sung Won Sohn, president of SS Economics in Los Angeles.
How much will rates go up?
Here’s the outlook:
▪ Homes. The average mortgage interest rate last week was 5.54%. That 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. That assumes a 20% down payment.
“Overall, within California, the real estate market is really kind of caught between a rock and hard place,” said Kyle Clark, investment advisor with Gerber Kawasaki, a California financial planning firm. He cited that rates are increasing and there hasn’t been a dramatic decrease in home prices.
While the Fed increase does not automatically translate into a specific mortgage interest rate, assume that the rate does go up three-fourths 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 the California Association of Realtors.
If the rate jumped a full percentage point, homebuyers would pay an additional $464 over current levels.
Jacob Channel, senior economist at LendingTree, an online lending marketplace, pointed out that while mortgage interest rates in the 5% to 7% range are still not high by historical standards, consumers feel more pain because housing prices have also spiked in recent years.
As a result, he said, “a lot of people are backing out of the housing market.”
Clark said applications for mortgages have “fallen off a cliff.” He said he thinks people have gotten used to the low interest rate environment of the last year where they could buy a home for two and a half percent. Now, interest rates have doubled, he said, and are causing people to re-evaluate whether they want to get into a long-term investment.
▪ Credit cards. “These rate increases are really adding up for credit cardholders, and all signs indicate that the Fed won’t be stopping anytime soon,” said Matt Schulz, chief credit analyst at LendingTree.
“That means that even though credit card (interest rates) are about as high as they’ve ever been, your credit card debt is only going to keep getting more expensive in the coming months, unless you take action,” he said.
He also had this warning: The rate you’re paying on the current balance will go up, generally within one or two billing cycles.
“That’s a pretty scary fact for folks wrestling with credit card debt,” he said.
▪ Car loans. Auto dealers are faced with two huge problems. Rising rates are one, but the other involves ongoing supply shortages.
“People who need a car are hit with a double whammy,” said Channel.
Single of City National Rochdale said that rates for a car loan are roughly 5.2% currently, adding that this is a significant increase from December when it was 3.5%.
However, the long-term average rate from 2000 to now is 5.25%.
“So yes, the rate has gone up, but it’s not on an onerous level,” Single said. “It’s one that we’ve seen before.”
The car issue has a disproportionate effect on lower income people. Unlike housing — where people who can’t afford to buy a home can rent or add a roommate — people who need cars have few alternatives other than public transportation.
A rate hike by the Fed this week would be its fourth increase this year, after keeping the rate near 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 to its current range of 1.5% to 1.75%. The Fed has signaled there could be three more increases this year.