Mortgage Rates Soar Again after Fed's Promises to Combat Inflation
According to Freddie Mac, the average mortgage rate for a 30-year fixed-rate home loan increased to 5.66% as of September 1, from 5.55% the previous week. This is a significant jump from the 2.87% during the same period last year.
The mortgage rates began the year at 3.22%, before skyrocketing in the first half, peaking at 5.81% in mid-June. However, concerns about the economy and the Federal Reserve's mission to curb inflation made the market volatile. The rates dipped in July and early August as recession fears subsided. However, Chair Jerome Powell's remarks last Friday about the Fed's strong action against inflation sent the rates soaring.
"The renewed market appreciation for a more aggressive monetary policy stance has pushed mortgage rates almost twice as high as they were a year ago," Sam Hart, Chief Economist at Freddie Mac, commented.
This could exacerbate the housing market slowdown and lead to a downward pressure on prices.
"The surge in mortgage rates comes at a particularly delicate time in the housing market, as sellers are adjusting their prices due to lower demand," Hart added.
The mortgage rates climbed as the 10-year U.S. Treasury yield reached its highest point since June.
The Federal Reserve does not set mortgage rates directly, but its policies influence them. Instead, mortgage rates tend to mirror the 10-year Treasury yield. When investors sell Treasury bonds, interest rates increase, which drives up mortgage rates, as investors demand higher returns for Treasury bonds that pay lower returns than mortgages.
"Markets continue to react to the Fed's firm commitment to tighten monetary policy to bring inflation closer to 2%," George Ratiu, a housing economist at Realtor.com, said.
As a result, homebuyers can expect mortgage rates to hover between 5% and 6% in the coming months. The persistently high inflation and tightening credit from the Fed will keep inflation elevated.
Let's revisit the scenario of a homebuyer from a year ago who made a 20% down payment on a $390,000 house and paid an average of $1,294 a month in mortgage payments with a 2.87% rate. Today, a homebuyer purchasing a similar house with a 5.66% mortgage rate would pay $1,803 a month in payments—an increase of $509 a month.
Hart noted that this could present an opportunity for homebuyers searching for properties, as homes are spending more time on the market, prompting sellers to lower their asking prices and allowing more room for negotiations.
"Given that housing sales are likely to continue to slow down through the fall, some buyers may be able to negotiate larger discounts that fit their budgets," Hart concluded.
Additional Insights
Mortgage rates are shaped by a complex interplay of macro-economic and industry factors. These include:
- The Federal Reserve's monetary policy: Adjustments to the benchmark federal funds rate can impact mortgage rates.
- Bond market dynamics: The 10-year Treasury yields influence mortgage rates.
- Inflation: Rising inflation can drive mortgage rates up as lenders seek to maintain purchasing power.
- Economic growth: Strong economic growth can lead to higher mortgage rates due to increased demand.
- Lender competition and operational costs: Lender competition and costs can also affect mortgage rates.
