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Why the Fed matters to regular Americans, in one stunning chart

·Senior Markets Editor
·3 min read

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

For the general public, the Federal Reserve can be an intimidating and arcane subject.

Why, you might ask, does it really matter what a few economists in Washington, D.C. think the right level of interest rates should be?

And while we believe there are several reasons the central bank's role in everyday life is under-appreciated, a report from real estate brokerage Redfin put the import of interest rates into stark relief.

Through the four-week period ended May 15, the average monthly cost of servicing a mortgage for a home asking the median sales price across the country was up 43.4% over the same period last year, according to Redfin's data.

And that jump resulted in the following chart, a jarring visual to represent the unprecedented increase in the cost of homeownership this year.

The monthly cost of buying a median-priced home in the U.S. has risen over 40% this year amid a surge in interest rates. (Source: Redfin)
The monthly cost of buying a median-priced home in the U.S. has risen over 40% this year amid a surge in interest rates. (Source: Redfin)

In the simplest terms, higher interest rates make it more expensive to borrow money. And the primary way most consumers interact with these costs is through buying a home.

Specifically, higher interest rates lead to higher mortgage rates, which lead to higher out-of-pocket costs to purchase the same home.

To be sure, home prices have been on the rise and play some role in these higher costs. Over the same four-week period ended May 15, according to Redfin, the median asking price for homes in the U.S. rose 17.9%. But a mid-teens increase in home prices has been about the national norm since the post-Covid homebuying frenzy began in earnest during the spring of 2021.

Furthermore, a steadier policy hand from the Fed throughout 2021 made these increases easier to absorb for buyers.

The average rate on a 30-year fixed mortgage in May 2021, for instance, stood at around 3%; by December 2021, the average rate on a 30-year fixed mortgage still stood at around 3%. This stable environment for homebuyers made adjusted to rising prices more predictable for consumers, and a robust housing market in 2021 resulted in the market beginning 2022 with record-low inventory.

Over the first 5+ months of 2022, however, the average rate on a 30-year fixed mortgage has risen from 3% to around 5.25% — the highest since 2009.

And the pain for potential buyers may not be done yet.

Last year, the Fed was still of the view that any inflation pressures would prove "transitory," and the central bank held interest rates near 0% as a result. As readers are well aware, inflation has for some months now been near four-decade highs. And in the face of these price changes, the Fed changed its tune.

So far this year, the Fed has raised rates at two meetings, most recently by 0.50% — its largest single-day increase since 2000. The Fed is expected to raise interest rates by this same amount in June and July. The rise in mortgage rates both responds to and anticipates these changes from the Fed.

Overall, with financial markets expecting at least another 2 percentage points of interest rate increases from the Fed during this rate hiking cycle, the difficulties for homebuyers may hardly be closer to ending than beginning.

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