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Mortgage

A 3% mortgage rate may be the new norm

But if home prices can't cool many buyers may miss out regardless

For the third consecutive week, mortgage rates pushed past 3% – with the average mortgage rate for a 30-year fixed loan up four basis points last week to 3.09%, according to Freddie Mac’s Primary Mortgage Market Survey.

Rising mortgage rates typically signify a recovering economy, and despite applications for mortgages dropping week-over-week, Freddie Mac’s chief economist Sam Khater expects a 3% rate to sustain market interest for many potential buyers.

A number of economists say rising rates may just be what the industry needs to cool the insane housing demand the market has been struggling to maintain for months. Increased inventory was the initial hope. However, due to consistent materials supply shortages and lumber prices that are up about 200% since April 2020, builders’ confidence index dropped in March. Single-family housing starts declined last month.

“The elevated price of lumber is adding approximately $24,000 to the price of a new home,” said NAHB Chairman Chuck Fowke. “Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.”

Now, economists are keeping a watchful eye on the speed in which interest rates have risen, said Doug Duncan, Fannie Mae’s senior vice president and chief economist.

“Underlying Treasury rates have risen, though lenders have absorbed some of the rise by shrinking spreads, as confirmed by our recent Mortgage Lender Sentiment Survey results,” said Duncan. “While the rate rise will curtail refinances to some degree, 2021 is poised to be a good year overall for housing activity and housing finance, as the economy continues to recover and COVID-19 restrictions ease.”

Duncan said Fannie Mae is watching for risks around monetary and fiscal policy on interest rates moving forward, though none are an immediate threat as the Federal Reserve has not changed its FOMC statement for several months.

Nevertheless, mortgage rates remain near historic lows (they are still 0.8 percentage points below the 2019 average), but if the price of housing can’t cool in time, many first-time homebuyers may miss the chance to take out a record low rate. Despite this risk, Fannie Mae’s baseline view is that the recent rapid rise will not continue but that rates will drift only modestly higher over the remainder of this year.

“Essentially, we believe the Fed will keep policy accommodative for longer, not tightening until inflation clearly exceeds its 2.0-percent target for a substantial period,” Fannie Mae said. “This view is consistent with current market measures, such as Fed Funds futures, not anticipating any rate hikes until 2023 and, even then, at a slow pace.”

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