This week marks another uptick in mortgage rates. According to Freddie Mac’s benchmark survey, the interest rate on a 30-year fixed-rate mortgage is now 5.54%.
“The Federal Reserve’s action to help manage inflation has created significant volatility in mortgage rates and, by extension, the housing market,” commented Sam Khater, Freddie Mac’s chief economist, in a statement announcing Freddie’s quarterly forecast.
Mortgage rates are up for the second week in a row as the market digested the news that inflation had increased to 9.1% in June; even higher than the anticipated 8.6%. Today’s 30-year rate is nearly 3% higher than the same week a year ago.
Rates for other loan categories are mixed. The 15-year fixed-rate mortgage moved up to 4.75% while the average rate on a 5/1 adjustable-rate mortgage is down to 4.31%.
What’s next for mortgage rates?
Mortgage rates are likely to keep rising over the next few weeks — the question is by how much?
Experts have widely anticipated that the Fed would increase the federal funds rate — the interest rate banks charge each other for overnight loans — by at least another 0.75 percentage points at next week’s Federal Open Market Committee meeting. And thanks to last week’s higher-than-expected inflation reading of 9.1%, some market observers now believe the Fed may need to raise rates by 100 percentage points in order to cool consumer price growth and start to bring inflation back under control.
Such a large increase could push mortgage rates up by more than half a percentage point, increasing the affordability strain that is already plaguing many potential homebuyers.
The federal funds rate isn’t technically linked to mortgage rates, but it can affect the yields on other financial instruments like treasury notes, which are tied to mortgage rates.
Looking ahead, borrowers should expect rates to continue to rise with consumer prices. How long rates will remain on an upward path depends on the success of the Federal Reserve’s moves to bring inflation back under control.
“Rates will stabilize only when signs of peak inflation appear,” said Lawrence Yun, chief economist at the National Association of Realtors, in a statement. “If inflation is contained, then mortgage rates may even decline somewhat.”
Rising rates are putting a damper on homes sales
Higher rates are already having an impact on prospective homebuyers as they struggle with affordability issues.
“Although house price appreciation will grow at a more moderate rate, home prices remain high relative to homebuyer incomes. Taken together, these factors are exacerbating affordability challenges and causing a slowdown in the housing market,” said Khater.
Existing home sales, which are based on contract closings, have decreased for the past five months, thanks in large part to rapidly rising mortgage rates. In June, existing home sales were at an annualized rate of 5.12 million units, the lowest number of sales since the spring of 2020, according to the National Association of Realtors.
If an adjustment is made for the COVID lockdown period during those spring months, June’s annualized rate is lower than the number of homes sold in 2019, before the pandemic hit.
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