When will this spike in mortgage and credit card interest rates end?
Maybe early next year. But not anytime soon, the experts said Wednesday.
A fresh round of increases in consumer interest rates is expected to be triggered by the Federal Reserve’s latest boost in its key interest rate.
The Fed Wednesday raised the rate another three-fourths of a percentage point, as inflation remains high. That’s its fifth increase this year, and one or two more are likely in 2022.
So far, the increases have helped send mortgage interest rates to levels not seen since 2008, and credit card rates are also on the way up.
With the latest increases, “it is hard to envision mortgage rates not rising into the 6.5% range,” if normal patterns hold, said Jordan Levine, vice president and chief economist at the California Association of Realtors.
There is some daylight ahead. The latest increase “doesn’t mean mortgage rates will follow suit” and keep rising at the same pace as the Fed hike, said Jacob Channel, senior economist at LendingTree, an online lending marketplace.
It’s the law of supply and demand. Last week’s average mortgage rate was 6.02%, up from 2.86% a year earlier.
If you’re borrowing $300,000 on a 30-year, fixed rate loan, that means you’d pay about $600 more per month. A boost to 6.5% would mean about another $50 monthly.
Consumers have reacted. Housing sales in California 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 down 22.1% in the Central Valley. The median statewide price was up 1.4% during that period, the smallest price increase in two years.
Channel figured lenders would not let rates spike much more if demand remains muted. Even at 6%, he said, “high demand evaporates.”
Barry Broome, the president and CEO of the Greater Sacramento Economic Council, said that he thinks inflation will ease when supply chains and labor markets straighten out.
As inflation rises, Broome said, incomes are barely moving. Prices were up nationally at an annual pace of 8.3% last month.
“Basically, everybody in America took a pay cut,” he said.
Credit card rates
Credit card rates also face the supply and demand issue. The average interest rate now is 21.59%. A year ago it was 19.47%.
That means that a year ago, someone with $5,000 in credit card debt paid $250 a month. They paid $985 in interest, and it took 24 months to pay the balance in full.
Under current rates, with the same amount of debt, the same $250 a month would take an extra month to pay off. They’d pay a total of $1,129 in interest.
Matt Schulz, chief credit analyst at LendingTree, said rates should keep going up.
“I think there’s still a good bit of climbing to be done before credit card rates hit their peak. The Fed clearly isn’t quite ready to take its foot off the gas yet when it comes to raising rates, so cardholders should expect card APRs (annual percentage rates) to continue to rise in coming months,” he said..
But he had this cautiously optimistic note: “They won’t rise forever, in part because the market simply wouldn’t bear it,” he said.
This story was originally published September 21, 2022 1:39 PM.