When will this spike in mortgage and credit card interest rates end?
Maybe early next year. But not anytime soon, experts said Wednesday.
A new wave of consumer interest rate hikes should be triggered by the latest hike in its key rate by the Federal Reserve.
On Wednesday, the Fed raised the rate by three-quarters of a percentage point as inflation remains elevated. This is its fifth increase this year, and one or two more are likely in 2022.
The increases so far have helped send mortgage interest rates to levels not seen since 2008, and credit card rates are also on the rise.
With the latest increases, “it’s hard to envision mortgage rates not hitting the 6.5% range,” if normal trends continue, said Jordan Levine, vice president and chief economist at the California Association of Realtors.
There is daylight ahead. The latest increase “doesn’t mean mortgage rates will follow” and continue to rise in step with the Fed hike, said Jacob Channel, senior economist at LendingTree, an online lending marketplace.
It is the law of supply and demand. The average mortgage rate last week was 6.02%, down from 2.86% a year earlier.
If you borrow $300,000 on a 30-year fixed rate loan, that means you’ll be paying about $600 more per month. An increase to 6.5% would mean about $50 more per month.
Consumers reacted. California home sales are down from a year ago and average prices are stabilizing.
“Interest rates are up and California housing markets are down,” said the UCLA Anderson California economic forecast released Wednesday.
Sales of existing homes statewide last month were down 24.4% from the same month last year and 22.1% in the Central Valley. The statewide median price rose 1.4% during that period, the smallest price increase in two years.
Channel said lenders wouldn’t let rates climb much higher if demand remained muted. Even at 6%, he said, “strong demand is evaporating.”
Barry Broome, president and CEO of the Greater Sacramento Economic Council, said he believes inflation will come down when supply chains and labor markets recover.
While inflation is rising, Broome said, incomes are barely moving. Prices rose nationally at an annual rate of 8.3% last month.
“Basically everyone in America took a pay cut,” he said.
Credit card rates
Credit card prices also face the problem of supply and demand. The average interest rate is now 21.59%. A year ago, it was 19.47%.
This means that a year ago someone with $5,000 in credit card debt was paying $250 a month. They paid $985 in interest and it took them 24 months to pay off the full balance.
Under current rates, with the same amount of debt, the same $250 a month would take an extra month to pay off. They would pay a total of $1,129 in interest.
Matt Schulz, chief credit analyst at LendingTree, said rates should continue to rise.
“I think there’s still a long way to go before credit card rates peak. The Fed is clearly not quite ready to ease off on rate increases just yet, so cardholders should expect card APRs (annual percentage rates) to continue to decline. ‘increase in the coming months,’ he said.
But he had this cautiously optimistic note: “They won’t go up forever, partly because the market just wouldn’t support it,” he said.
This story was originally published September 21, 2022 1:39 p.m.
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