The 30-year fixed rate mortgage, the most popular home loan product, has nearly doubled in the past nine months.
Freddie Mac, the federally chartered mortgage investor, aggregates rates from about 80 lenders across the country to arrive at weekly national averages. The survey is based on mortgages on the purchase of a home. Refinance rates may be different. It uses rates for high quality borrowers with strong credit scores and large down payments. Due to criteria, these rates are not available to all borrowers.
The average of 15-year fixed rates jumped to 5.21% with an average of 0.9 points. It was 5.16% a week ago and 2.12% a year ago. The average of the adjustable rates over five years rose to 4.93% with an average of 0.2 points. It was 4.64% a week ago and 2.51% a year ago.
“Mortgage rates have risen four weeks in a row on investor concerns about inflation,” said Holden Lewis, real estate and mortgage expert at NerdWallet. “Their concerns are warranted, as we learned this week that inflation was higher than expected in August, as evidenced by the consumer price index. This news has pushed up mortgage rates — a phenomenon that will be reflected in rates next week. The Federal Reserve was already set to raise short-term rates next week in its effort to contain inflation. They may increase their aggressiveness in response to this week’s surprisingly high inflation report, pushing mortgage rates even higher.
Inflation data released by the Bureau of Labor Statistics this week showed an acceleration in consumer prices in August, particularly for items such as housing and food. The consumer price index pushed housing costs up 0.7% in August and 6.2% a year, the biggest increase since 1991.
Stocks fall after inflation report shows unexpected price rise in August
August’s inflation reading surprised investors, who wondered if the Federal Reserve will consider raising its benchmark rate by 100 basis points, rather than 75 basis points as it did in July. (One basis point equals 0.01 percentage point.) The Fed’s rate-setting committee meets next week.
In an effort to curb inflation, the central bank has raised the federal funds rate four times this year. It started with a 25 basis point increase in March, followed by a 50 basis point increase in May and consecutive 75 basis point increases in June and July. The Fed will likely want to see signs of slowing inflation before reversing the rate hike.
When investors worry about inflation, their appetite for buying bonds decreases because the return on their investment is lower when inflation is high. Inflation erodes the value of a bond’s future payments. A drop in demand causes bond prices to fall and yields to rise. Since mortgage rates tend to follow the same path as the 10-year Treasury yield, they also rise.
The 10-year Treasury yield rose to 3.42% on Tuesday before slipping to 3.41% on Wednesday, its highest level since mid-June.
“The higher-than-expected CPI gave the Fed permission to go ahead with its 0.75 percentage point hike, with some economists even suggesting that a one percentage point hike would be viable” , said Nicole Rueth, production manager of the Rueth team. “Mortgage rates have already baked into this move with the jump we’ve seen over the past two days.”
House prices should fall but not collapse
Mortgage rates may not have peaked yet, Rueth said.
“Comparative inflation from a year ago still has us replacing very low inflation in September 2021,” she said. “With today’s inflationary pressures – Russia, China and now the railway strike – we could see the September CPI – released in early October – even higher. October 2021 inflation has started the uptrend, so year-over-year comparisons will give us some relief.As inflation declines, so will mortgage rates.
Bankrate.com, which publishes a weekly index of mortgage rate trends, found that more than three-quarters of surveyed experts expect rates to rise in the coming week.
“Inflation remains widespread and problematic,” said Greg McBride, chief financial analyst at Bankrate.com. “The Fed will continue to be aggressive in raising rates, and there is more supply of mortgage-backed bonds that need to be absorbed as the Fed pulls back.”
Calculate the cost of additional mortgages as interest rates rise
Meanwhile, rising rates have weakened demand for mortgages to their lowest level in more than two decades. The composite market index – a measure of the total volume of loan applications – fell for the fifth week in a row, falling 1.2% last week, according to data from the Mortgage Bankers Association.
The refinancing index fell 4% and was 83% lower than a year ago. The buy index fell 12%. The refinancing share of mortgage activity represented 30.2% of applications.
“The mortgage market got off to a slow start in the first full week of September as demand declined due to mortgage rates surging to highs not seen in 2008,” wrote Bob Broeksmit, President and CEO. of MBA, in an e-mail. “With all eyes on the Federal Reserve’s next steps to rein in high inflation, borrowers can expect continued volatility in mortgage rates.”
Not only are fewer borrowers applying for mortgages, but those who do face tougher lending standards. The MBA also released its Mortgage Credit Availability Index (MCAI), which showed that credit availability fell in August. The MCAI slipped 0.5% to 108.3 last month. A decrease in the MCAI indicates that lending standards are tightening, while an increase indicates that they are loosening.
“The availability of mortgage credit fell slightly in August as investors reduced their mortgage offers. [adjustable-rate mortgages] and no-[qualifying mortgage] loan programs,” MBA economist Joel Kan said in a statement. “With overall origination volume expected to decline in 2022, some lenders continue to streamline their operations by exiting certain lending programs to simplify their offerings. Additionally, with a deteriorating economic outlook and signs of slowing price growth houses, the appetite for riskier loan programs has been reduced.
“However, a slight increase in the past month slightly offset these trends. [home equity line of credit] some products. With overall home equity still at high levels, HELOCs could benefit borrowers who may not want to give up their current low mortgage rate, but want to use their home equity to support others. spending plans.