Home prices are falling as rates rise, but the Fed's sway over the housing market is tricky, experts say

• The housing market is likely in for more pain as the Fed continues to raise interest rates.
• But the central bank's influence over the sector is direct and indirect, experts said.

The Federal Reserve's jumbo rate hike will likely usher in more pain for the housing market, but the central bank's influence over the sector is direct and indirect, experts said.

To be sure, home prices have been heading lower as increases in the fed funds rate pushes the 10-year Treasury yield and mortgage rates higher. But they don't always move in lockstep.

For example, the Fed has boosted benchmark rates up by a total of 375 basis points since March, while the 10-year yield has climbed by 200 basis points in that time, according to CIBC Private Wealth head of fixed income Gary Pzegeo.

The 10-year Treasury yield acts more like a middleman between Fed policy and mortgage rates, he told Insider.

"An increase by the Fed might not increase the 10-year yield," he said. "This flattening of the curve is typical in the later stages of tightening cycles."

Inflation is they key to mortgage rate

Meanwhile, Bankrate.com chief financial analyst Greg McBride went further in separating Fed rate hikes from borrowing costs in the housing market.

"Inflation is much more of a barometer of what we'll see going forward with mortgage rates than the Fed," he said in an interview.

Inflation drives Fed policy decisions on short-term rates while longer-term rates move in advance of the Fed, and as long as inflation remains sticky, those rates aren't likely to abate, McBride added.

Vantage market analyst Jamie Dutta said the cost of new mortgages will increase, cooling demand and lifting rents higher.

And higher mortgage rates could also encourage riskier loans, he warned, pointing out that a five-year adjustable rate mortgage — the type of loan at the center of the last housing crash — is more than 1 percentage point lower than the typical 30-year fixed rate mortgage.

Elsewhere, Freddie Mac said the Fed's latest jumbo interest rate hike will hobble the US housing market even further.

"Unsure buyers navigating an unpredictable landscape keeps demand declining, while other potential buyers remain sidelined from an affordability standpoint," Sam Khater, the mortgage giant's chief economist, said on Thursday. "Yesterday's interest rate hike by the Federal Reserve will certainly inject additional lead into the heels of the housing market."