High interest rates hammer consumers looking for mortgages or car loans

The banking crisis that erupted earlier this month led to some predictions of a halt to rate hikes, as past increases in borrowing costs were the cause of the financial problems.

Instead, the Federal Reserve imposed another rate hike on Wednesday, extending a years-long blitz of rate hikes that risk further banking problems and strain another group: consumers in need of a loan.

Accelerating rate hikes have caused borrowing costs for mortgages, car loans and credit cards to soar, straining US household budgets or forcing them to postpone buying expensive items.

However, some borrowing costs have fallen slightly since the outbreak of the banking crisis in response to renewed recession fears, suggesting relief for borrowers could come in the coming months, but alongside a possible economic downturn, experts told ABC News.

“For ordinary families who need a new car or need to move, when the Fed slams on the brakes and interest rates on loans go up, they really get constrained,” said Andrew Levin, a Dartmouth College economics professor and former special adviser. of the Federal Reserve Board. told ABC News.

“Now people who need a car or a house can’t afford it,” he added.

The Fed has proposed a series of increases in borrowing costs to reduce inflation by slowing the economy and curbing demand. That means borrowers face higher costs on everything from car loans to credit card debt and mortgages.

The average 30-year fixed-rate mortgage rate stands at 6.6%, up sharply from a year ago when it was 4.6%, an analysis by Bankrate found.

Every one percentage point increase in a mortgage rate can add up to thousands or tens of thousands of additional costs each year, depending on the price of a home, according to Rocket Mortgage.

Consumers who have been tempted to write off higher charges on a credit card have also faced skyrocketing rate hikes on that debt.

According to WalletHub, the average credit card interest rate in the US during the last three months of 2022 was 21.6%, up from 18.2% a year earlier.

“Higher interest rates mean you really can’t spend that much on big items,” Derek Horstmeyer, a professor of finance at George Mason University’s School of Business, told ABC News. “There’s a direct connection.”

To be sure, the Fed raised interest rates as part of an attack on skyrocketing inflation, a distinct source of financial anxiety for American households.

Inflation has fallen significantly since a summer peak, but remains more than triple the Fed’s target of 2%.

“If you raise fares a lot, it can feel like hard braking and be quite uncomfortable for passengers,” Levin said.

“On the other hand, households have been hit very hard by high inflation in recent years,” he added. “Passengers don’t want to go down a mountain at high speed either.”

While the cost of borrowing is well above year-ago levels, the recent banking crisis has brought a burst of unexpected relief, experts say.

Mortgage rates fell for a second week in a row, according to data released Thursday by Freddie Mac.

The drop in mortgage rates is due to a quirk in the relationship between interest rates and home loan costs.

Mortgage rates closely track 10-year Treasury bond rates, which themselves correlate with expectations for the Fed’s benchmark interest rate for years to come, Levin said.

If investors believe that interest rates will turn quickly, a fall in mortgage rates often precedes the interest rate pivot.

The financial troubles have increased fears of a recession, leading investors to expect a significant reduction in interest rates over the next 12 to 18 months, which in turn has pushed down mortgage rates, Levin said.

“If that expectation holds, 10-year Treasury yields will come down quite a bit,” Levin said. “It then lowers mortgage rates and that improves affordability for families who want to move or first-time buyers who want to buy a house.”

Auto loans are likely to follow a trajectory similar to that of mortgage interest, although credit card costs will lag behind, Levin said.

“Maybe there is a glimmer of hope,” he added.

However, this optimism is tempered by the economic strength that would drive down interest rates: a recession.

“This crisis, in which we broke a few banks, is likely to push us into recession,” Horstmeyer said, noting that the contiguous job losses and declining demand should bring inflation down and allow the Fed to lower interest rates.

“That sort of did the Fed’s job for it,” he added.






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