The 30-year mortgage — the most popular home loan product — rose to 6.02 percent this week, nearly double what it was nine months ago, according to data released Thursday by Freddie Mac. It has not been this high since November 2008.
The jump came as inflation data released by the Bureau of Labor Statistics this week showed Consumer price acceleration In August, especially for items such as housing and food. The CPI for housing costs rose 0.7 percent in August and 6.2 percent annually, the largest increase since 1990.
“Mortgage rates have risen for four consecutive weeks due to investor concerns about inflation,” said Holden Lewis, a real estate and mortgage expert at NerdWallet. Their concerns are justified, as we learned this week that inflation rose more than expected in August, as evidenced by the Consumer Price Index. That news boosted mortgage rates higher — a phenomenon that will be reflected in rates next week.”
The 30-year flat average started the year at 3.22 percent. After rising to 5.81 percent in late June, it eased back in July and early August as fears of a recession spread. But since dropping to 5.13 percent on August 18, the 30-year flat average has risen by nearly a percentage point in one month. The rates are still below the historical average of 7.8 percent, according to Freddie Mac.
The sudden rise in prices this year has led to lower house prices and lower sales. Prices started to moderate but remained high. The latest Standard & Poor’s Case-Shiller home price index showed prices rising 18 percent annually in June, down from 19.9 percent the previous month. Home sales fell in July for the sixth month in a row. Housing starts, a measure of new home construction, also sank that month.
“Mortgage rates of 6 percent or higher are likely to be the new reality, and rates will have to adjust,” said Lisa Sturtevant, chief economist at Bright MLS, the region’s multiple listing service. “Relatively strong demand and still-low inventory will continue to support stable or increasing prices in most markets, but gone are the days of seeing bids over tens or even hundreds of thousands of dollars over the asking price. In some places, particularly high-cost markets and places where Where prices have grown faster over the past two years, we can see price drops year on year.”
The demand for mortgages fell rapidly as their rates rose. Total order volume declined for the fifth consecutive week, according to the Mortgage Bankers Association. Refinancing is off 83% from a year ago.
“With all eyes on the Federal Reserve’s next steps to tame high inflation, borrowers can expect continued volatility in mortgage rates,” Bob Broxsmith, president and CEO of MBA, wrote in an email.
Affordability of homes fell to a new low for first-time buyers in the second quarter, according to a recent analysis of the nation’s largest metropolitan areas by NerdWallet. Although more homes are being put on the market, high prices and stagnant wages have kept buyers on the sidelines. NerdWallet found that homes are for sale at 6.5 times the typical income of a first-time buyer across 50 US metros, and 6.6 times their income nationwide. The recommended standard for first-time buyers is three times their income.
The August inflation reading surprised investors, who are wondering whether the Federal Reserve will consider raising its benchmark interest rate by 100 basis points, instead of 75 basis points as it did in July. (Base point is 0.01 percentage point). The Federal Reserve’s interest 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 successive 75 basis point increases in June and July. The Fed will likely want to see signs of declining inflation before it pulls back from raising interest rates.
“The Fed was already going to raise short-term interest rates next week as part of its efforts to rein in inflation,” Lewis said. “It may intensify aggressiveness in response to this week’s unexpectedly high inflation report, driving mortgage rates higher.”
When investors are concerned about inflation, their appetite for bond purchases diminishes because the return on their investment is lower when inflation is high. Inflation erodes the value of a bond’s future payments. Lower demand leads to lower bond prices and higher yields. Since mortgage rates tend to follow the same path as the 10-year Treasury yield, they are also rising.
The yield on the 10-year Treasury rose to 3.42% on Tuesday before falling to 3.41% on Wednesday, its highest level since mid-June.
“The higher-than-expected CPI gave the Federal Reserve permission to go ahead with a 0.75 percentage point increase with some economists suggesting that a one percentage point increase would be viable,” said Nicole Roth, director of the product division on the Rueth team. “Mortgage rates have already made the move with the jump we’ve seen over the past couple of days.”
Mortgage rates may not have peaked yet, Roth said.
“Comparative inflation from last year we still have a very low inflation substitution in September 2021,” she said. “With inflationary pressures today… we can see the September CPI – released as early as October – is still higher. October 2021 inflation started to trend upward, so annual comparisons will give us some relief. With lower inflation, it will go down. Mortgage rates too.
An earlier version of this story stated that the CPI for housing costs saw its largest increase since 1991. It is the largest increase since 1990.
“Avid problem solver. Extreme social media junkie. Beer buff. Coffee guru. Internet geek. Travel ninja.”