Mortgage rates are surging again due to sustained economic growth and continued inflation, eclipsing 7% on Thursday. And it could be a while before they tick back down, economists say.
The 30-year fixed-rate mortgage on Thursday, March 2 touched 7.10%, up 16 basis points from 6.94 on Wednesday.
The most recent survey by Freddie Mac measured 30-year fixed-rate mortgages at 6.65% for the week ending Thursday, driven by the 10-year Treasury surpassing 4.0%.
The high level of rates comes after a period of relative optimism in January and early February, when the 30-year fixed-rate fell on expectations of lower economic growth, cooling inflation and loosening monetary policy. But recent consumer price reports and a strengthening jobs market have led to a boomerang effect on mortgage rates, said Sam Khater, Freddie Mac’s chief economist.
“Lower mortgage rates back in January brought buyers back into the market. Now that rates are moving up, affordability is hindered and making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates,” he said.
Investors are expecting inflation to remain elevated for longer, requiring the Federal Reserve to keep increasing its policy rate. The Fed signaled that it sees its monetary tightening having an effect on price growth, but with a strong employment market, wages keep consumers spending.
At the same time, consumers have taken on a record amount of debt, including mortgage, personal, auto, and student loans. In addition, the personal savings rate has dropped significantly from the pandemic high, as high prices have been squeezing household budgets. With rising interest rates, financial burdens are expected to increase, making consumer choices more difficult in the months ahead.
That has essentially frozen the market, particularly for buyers who were considering making the jump but perhaps missed the small window in winter, when for one day rates fell to 5.99%.
“Applications have definitely slowed down in the last few weeks. I feel like we have some people sitting on the fence again,” said one loan officer in the Portland, Oregon market. “I have one borrower that made an offer last week but withdrew this week when he saw that the rate was closer to 7%. He wants to wait and see where interest rates go.”
If mortgage rates remain in the high 6s, low 7s, home prices are going to have to come down measurably to give the market a jolt, economists said.
“At today’s rates, home prices would have to fall by 30% in order for homebuyers who are purchasing the median-priced home to have the same monthly payment they would have a year ago,” said Lisa Sturvetant, the chief economist for Bright MLS. “So why aren’t home prices falling further? While prices are down from their summer peaks and price growth has declined significantly, the median home price nationally is slightly higher than it was at the beginning of 2022. There are two reasons for this price stability—record low inventory and record high equity. Buyers are still competing for very few homes in the market which keeps upward pressure on prices. At the same time, repeat buyers are able to roll significant housing equity into their home purchase, basically ‘buying down’ the higher rate to make their new home purchase more affordable.”
The LO in the Portland, Oregon area said she’s trying to get creative to help clients, pursuing 3/2/1 and 2/1 mortgage rate buydowns.
“But with all of the volatility it’s been a struggle to get sellers to give the kind of credits we need for those programs. If rates remain this high for a period of time, I believe that will change. I’m hearing from Realtors that some portfolio lenders are offering 5/1 or 5/6 ARMs in the low 5% range that they will keep on their own books until things settle down. That’s tough to compete against.”
She added: “The new AMI (area median income) programs are great for first-time homebuyers because they waive all of the new LLPAs associated with conventional loans. We just have to make sure they meet the income limit of 100% of the AMI for the county that the home is in. To me, that seems to be the most promising program right now for conventional loans.”
Additional data on inflation and jobs will come in on the 10th and 14th of March.