"They Go Up, Tiddlee, Up, Up, They Go Down, Tiddlee, Down, Down"

(Do you know the reference? Yep! It's the epic 1965 comedy, Those Magnificent Men in Their Flying Machines.)

Though they could, in this instance, interest rates neither went up, tiddlee, up, up nor down, tiddlee, down, down. The Fed decided against cutting interest rates. Just about everyone (including the Fed) expected interest rate cuts this spring. However, given current inflation levels, the Fed decided to keep rates as they are. The Fed also signaled it would likely keep interest rates as-is for the rest of the year.

Of course, the Fed’s current stance could change—I will let you know if it does. The Fed is scheduled to meet again in June, July, September, November, and December.

What does the Fed’s current position on interest rates mean? The Fed believes (a) that inflation is growing too rapidly and (b) that higher interest rates lead to lower inflation levels. By keeping the interest rates higher, the Fed expects inflation to cool to 2%. Once inflation has cooled, it’s possible the Fed will lower interest rates.

You may have seen the federal funds interest rate as set at 5.25% to 5.5%, but if you try to obtain a mortgage, you’ll see a higher rate. Why is that? The 5.25% to 5.5% federal funds rate is the rate at which banks borrow money from each other overnight. When banks lend money to the public, they pad the interest rate in order to make money. The interest rate for a mortgage today is around 7.6% for a 30-year fixed rate mortgage and 6.8% for a 15-year fixed rate mortgage.

What does this mean for us?

Here’s what I think.

1.      People will see their buying power reduced.

2.      The bottom will be squeezed out of home ownership.

3.      People who would have sold will stay in place.

First, people’s buying power is reduced. Let’s say a person was approved to buy a $1,000,0000 home a couple of years ago when interest rates were lower. That same person may only be approved to buy a $800,000 home today.

Second, the bottom will be squeezed out of home ownership and will continue to rent. Just like our million dollar buyer became an $800,000 buyer, so a person who would have bought a $800,000 home a couple of years ago will now buy a $600,000 home and so on until the person who would have bought a $200,000 home (yes, those still exist in the DMV 😊) can no longer afford to buy and is forced to continue to rent.

Third, people, such as baby boomers, who would have sold their home to downsize to a home more suited to their present lifestyle, will stay where they are.