Mortgage — The economy has been on an inconsistent flow since the pandemic, with inflation striking a major blow in 2022. As a result, several industries have also felt the effects of the Federal Reserve’s persistent efforts to curb inflation. Although there have been moments of relief, inflation remains.
One of the most glaring issues in the economic landscape today is the increase in mortgage rates.
On Thursday, it was reported that the rates rose for the third consecutive week. However, one key takeaway from the increasing rates is that it remains under the 7% threshold.
On Thursday, Freddie Mac released some new data that showed the 30-year fixed-rate mortgage averaging 6.96% in the week ending August 10. The latest update showed that it had gone higher than the 6.90% from a week earlier. In 2022, the 30-year fixed-rate mortgage had been significantly lower at 5.22%.
The Federal Reserve’s historic rate-hiking campaign has led to elevated mortgage rates, bringing home affordability to its lowest level in the past couple of decades.
People looking to buy a home will find it is more financially straining due to the added cost of financing the mortgage. In addition, homeowners who had locked in lower rates are now hesitant to sell. As a result, prospective buyers are stuck in a dilemma of having to deal with low inventory and high costs.
Since the end of May, rates have continued to rise above 6.5%. The recent average rate is on-level at a peak since November.
“There is no doubt continued high rates will prolong affordability challenges longer than expected,” said Freddie Mac.
“However, upward pressure on rates is the product of a resilient economy with low unemployment and strong wage growth, which historically has kept purchase demand solid.”
To elaborate, the average mortgage rate is derived from the mortgage applications Freddie Mac receives from a number of lenders across the United States. The survey covers borrowers who have excellent credit scores and put 20% down.
Employment and inflation data
After the Federal Reserve pointed out that it relied on jobs and inflation data during its July monetary policy meeting, the rate stayed elevated this week.
Markets were eager to see the July inflation report released on Thursday morning, which showed that inflation soared to 3.2% annually compared to the 3% annual increase in June. The recent update indicated that it was the first time inflation picked up since 2022. In addition, the data showed shelter costs contributing 90% of the total increase in inflation last month.
“July’s Consumer Price Index holds significant importance for the Fed’s upcoming decision,” said Realtor.com economist Jiayi Xu.
Xu added that the faster pace of price increases could fuel the Fed’s concern that inflation will continue to linger longer than expected. The Federal Reserve will also take the upcoming August employment and inflation data into consideration before the next policy meeting in September.
Furthermore, Xu noted that the latest jobs report provided mixed signals regarding the labor market as a smaller number of net new jobs were added while the unemployment rate dipped.
“While July’s jobs report itself is very unlikely to have a direct impact on the Fed’s upcoming decision, the decline to a 3.5% unemployment rate may imply that more significant slowing is needed to align with the Fed’s projected year-end rate of 4.1%,” she said.
Mortgage affordability problems persist
Keeping Current Matters chief economist George Ratiu said that borrowing costs will stay high until financial markets receive an “all clear” signal from the Federal Reserve.
Although the Fed isn’t responsible for setting the interest rates that borrowers pay directly on mortgage, they are still a prominent influence. For example, mortgage rates track the yield on 10-year US Treasuries that move based on anticipation of the Fed’s actions, what they do, and investors’ reactions.
Mortgage rates rise when Treasury yields shoot up, and they follow suit when they go down.
Ratiu said that mortgage rates are currently running higher than they should be in relation to the 10-year Treasury. He also pointed out that the spread between the 30-year fixed rate mortgage and the 10-year Treasury is around 300 basis points. The level has been scarcely seen in the past 50 years, mostly showing up during high inflation and economic turbulence.
“In the absence of the elevated risk premium and hewing closer to a historical average of 172 basis points, today’s 30-year fixed mortgage rate would be around 5.7%,” said Ratiu.
The Mortgage Bankers Association said that homebuyers are still sensitive to elevated interest rates, alluding to a drop in mortgage rates applications last week.
“Due to these higher rates, there was a significant pullback in mortgage application activity,” said MBA president and CEO Bob Broeksmit. “Both prospective buyers and sellers are feeling the squeeze of higher rates as well as low housing inventory, which has prompted a pronounced slowdown in activity this summer.”
George Ratiu said that sales of existing homes have been lagging despite real estate markets benefiting from more people getting employed and receiving improved paychecks this year.
“The challenge comes mainly from too many buyers chasing not enough available properties,” he added.
With history as his reference, Ratiu noted that mortgage rates usually cool off once inflation subsides, experiencing a six-to-eight-month lag.