Mortgage rates are skyrocketing thanks to the Fed, but buyers who can endure this tough and changing market will be rewarded.
The 30-year fixed-rate mortgage averaged 5.27% for the week ending May 5, according to data released by Freddie Mac FMCC,
+0,97 %
Thursday. That’s an increase of 17 basis points from the previous week – one basis point equals one hundredth of a percentage point, or 1% of 1%.
This represents the highest point for the benchmark 30-year mortgage product since August 2009. To put this into context: the last time mortgage rates were this high, Barack Obama was just months away from his first term as president, the nation was in the depths of the Great Recession and Instagram had yet to launch.
The average 15-year fixed-rate mortgage rate rose 12 basis points over the past week to 4.52%. The 5-year Treasury-indexed hybrid variable-rate mortgage averaged 3.96%, up 18 basis points from the previous week.
Mortgage rates are roughly pegged to the yield of the TMUBMUSD10Y 10-year Treasury note,
3,033%.
But the difference between the average 30-year mortgage rate and the 10-year Treasury rate has widened recently.
Since the end of the Great Recession, the gap between the two has averaged 1.7 percentage points, but it currently hovers above 2%. If the spread were closer to historic levels, the 30-year fixed rate mortgage would still be below 5%.
The Federal Reserve is largely to blame for mortgage rates rising at a faster pace than expected, according to analysis by Odeta Kushi, deputy chief economist at title insurer First American FAF,
-2,09%.
Investors buying mortgage-backed securities have already factored expectations that the Federal Reserve will continue to raise rates throughout this year into their view of the mortgage market.
Lenders, therefore, need to raise the rates they offer consumers so they can continue to sell their loans to investors – those sales are what generate the funds used to produce more mortgages.
“While some additional Fed tightening is already priced into today’s average mortgage rates, continued inflationary pressure is likely to push mortgage rates even higher in the months ahead,” Kushi said.
Rising short-term interest rates aren’t the only way the Fed is influencing the mortgage market. The central bank itself has been a buyer of mortgage-backed securities since the start of the pandemic. So now that the Fed will reduce its bond balance sheet, including these securities, there could be an impact on mortgage market liquidity. Lenders should make up the difference by raising rates.
Recent housing market data has already shown the massive effect that soaring rates have had on home buyers. “The pandemic boom in home sales is over and activity has returned to pre-pandemic levels,” wrote US economist Alex Pelle of Mizuho Securities and Chief US Economist Steven Ricchiuto in a research note. .
It is clear that the affordability issues posed by rising rates and prices have dampened demand from homebuyers. Nevertheless, real estate advertisements remain rare. This means house prices will likely continue to grow – albeit at a slower pace – because even with a reduced pool of buyers, there aren’t enough properties to expand, analysts say.
And it’s possible that rising interest rates could also dampen the supply of homes for sale. “Existing homeowners are stuck when their current mortgage rate is lower than the prevailing market mortgage rate because there is a financial disincentive to sell their home and buy a new home at a higher mortgage rate,” Kushi said.
Most economists expect the housing market to clear, which means bidding wars and contingencies may soon be a thing of the past.
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