Mortgage rates hit 5% for the first time since 2011

Mortgage rates are rising rapidly – topping 5% for the first time in more than a decade – and they’re starting to temper the booming housing market.

The 30-year fixed-rate average, the most popular mortgage product, hit the new threshold this week, Freddie Mac reported Thursday. It had not been this high since February 2011.

Low rates fueled the US housing market’s recovery from the Great Recession and helped push home prices to record highs. But after two years of floating at historic lows, rates have fallen: in January, the 30-year fixed average was 3.22%. It was 3.04% a year ago.

Although mortgage rates were expected to rise, their rise was faster than many economists had expected. Boosted by inflation, rates soared.

Inflation, which has hit consumers hard in their daily lives, is also causing difficulties for homebuyers. Several months ago, a home buyer was looking to pay $1,347 one month on a $300,000 loan at 3.5%. If the buyer waited until this week, the same 5% loan would increase the monthly payment by $263, to $1,610.

The Federal Reserve’s efforts to control inflation are behind the rate hike. Although the Fed does not set mortgage rates, it influences them. The central bank took the first steps towards reducing inflation earlier in March when it raised its benchmark rate for the first time since 2018. In addition to the fed funds rate hike, the Fed will soon begin the process of reducing its balance sheet.

The Federal Reserve holds about $2.74 trillion in mortgage-backed securities. He said he will reveal his plans to reduce his holdings at his May meeting. The more aggressively the Fed sells these bonds, the faster mortgage rates will rise.

The cost of housing does not only weigh on buyers and sellers. It has also proven to be a major complication for economic recovery and potentially undermines the ability of policymakers to control inflation that has spread throughout the economy.

Inflation is rising at the fastest pace in 40 years, with prices climbing 8.5% in March from a year earlier. Housing is a significant part – about a third – of the basket of goods and services used to calculate inflation, or what is known as the “consumer price index”. This means that if housing costs do not recover significantly soon, it will be that much harder for headline inflation to simmer to more normal levels.

Housing costs also stand out from other categories, such as gas, food or airfare, which may be more sensitive to forces such as the ongoing pandemic, supply chain disruptions or a war.

For example, gas or energy prices are unlikely to stay as high as they were when Russia invaded Ukraine and had huge consequences for global energy markets. Food may also become cheaper as supply chains smooth out over time.

But these forces do not apply to housing costs in the same way. Landlords who can lock in higher rents likely won’t cut prices a year later. Buyers will continue to clamor for the few available homes. And since the housing market has been supercharged by competitive bidding wars and all-cash deals, it’s unclear how drastically demand will need to cool before the cost of housing recovers significantly.

Even Fed officials are riding the wave. This week, Fed Governor Christopher Waller said he sold his home in St. Louis to a cash buyer without an inspection.

“The national housing market is beyond belief,” Waller said during a Monday community listening session hosted by the Fed.

It was the actions of the Fed during the pandemic that drove down mortgage rates. The 30-year fixed average hit a low of 2.65% in January 2021. By lowering the federal funds rate to near zero and buying treasury bills and mortgage-backed securities to support the economy, the central bank ushered in an era of cheap home loans.

When borrowing became cheaper, house prices rose as buyers could afford to spend more on housing. The latest Case-Shiller housing index showed prices rose 19.2% in January, year-on-year. Phoenix, Tampa and Miami recorded increases of 32.6%, 30.8% and 28.1%, respectively.

Prices should moderate, but rising rates will continue to make affordability difficult. And while higher rates should slow home buying over time, the factors that led to the housing boom remain. Inventories remain low and demand remains high.

“We’ve already seen buyer activity slow in terms of home sales,” said Lisa Sturtevant, a housing market analyst in Alexandria, Va. I think we’re probably going to see a pretty strong spring as people try to get in before they think rates will go up any further.

With rising rates, the mortgage market boom in 2020 and 2021 has slowed this year. Refinance requests have fallen to the lowest level since 2019. The Mortgage Bankers Association predicts that overall finance requests will decline by more than 35% this year. Buy origins are expected to increase 4%, but refinance origins are expected to fall 64%.

“Jumping mortgage rates will slow the housing market and further reduce demand for refinancing the rest of this year,” MBA chief economist Mike Fratantoni said in a statement. “Rising home prices and rates along with ongoing supply constraints are now expected to drive existing home sales down year-over-year.”

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