The 30-year fixed-rate mortgage — the most popular mortgage 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 that consumer prices accelerated in August, particularly for items such as housing and food. The consumer price index had housing costs up 0.7 per cent in August and 6.2 per cent higher annually, the biggest increase since 1[ads1]990.
“Mortgage rates have risen four weeks in a row on investor concerns about inflation,” said Holden Lewis, housing and mortgage expert at NerdWallet. “Their concerns are justified, as we learned this week that inflation was hotter than expected in August, which is reflected in the consumer price index. This news pushed up mortgage rates – a phenomenon that will be reflected in next week’s interest rates.”
Shares fall after the inflation report shows an unexpected price rise in August
The 30-year fixed average began the year at 3.22 percent. After rising to 5.81 percent in late June, it slowed in July and early August as fears of a recession took hold. But since falling to 5.13 percent on Aug. 18, the 30-year fixed average has risen nearly a percentage point in a month. Prices are still below the historical average of 7.8 percent, according to Freddie Mac.
Calculate how much more mortgages will cost when interest rates rise
The sudden increase in prices this year has made housing less affordable and cooled sales. Prices have started to moderate, but remain high. The latest Standard & Poor’s Case-Shiller home price index showed prices up 18 percent annually in June, down from 19.9 percent the month before. Home sales fell in July for the sixth consecutive month. Housing starts, a measure of new housing construction, also fell that month.
“Mortgage rates at or above 6 percent are likely the new reality, and prices will have to adjust,” said Lisa Sturtevant, chief economist at Bright MLS, the area’s multiple listing service. “Relatively strong demand and continued low inventory will continue to support stable or growing prices in most markets, but the days of seeing offers tens or even hundreds of thousands of dollars above asking price are over. In some places, particularly high-cost markets and places where prices has grown the fastest in the last two years, we could see price drops from year to year.”
House prices are expected to fall, but not crash
Demand for mortgages has fallen as quickly as interest rates have risen. Total application volume fell for the fifth week in a row, according to the Home Loan Association. Refinancing is 83 percent lower than 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 Broeksmit, MBA’s president and CEO, wrote in an email.
Home affordability 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 came on the market, higher prices and stagnant wages kept buyers on the sidelines. NerdWallet found that homes were listed for sale at 6.5 times the typical first-time home buyer’s income across 50 US metros, and 6.6 times the income nationwide. The recommended standard for first-time buyers is three times the income.
August’s inflation reading surprised investors, who wonder if the Federal Reserve will consider raising its benchmark interest rate by 100 basis points, instead of the 75 basis points it did in July. (A basis point is 0.01 percentage point.) The Fed’s interest rate committee meets next week.
In an attempt 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 back-to-back increases of 75 basis points in June and July. The Fed is likely to see signs of inflation easing before it backs off on raising interest rates.
“The Federal Reserve was already set to raise short-term interest rates next week in its bid to contain inflation,” Lewis said. “They could dial up the aggressiveness in response to this week’s unexpectedly high inflation report, driving mortgage rates higher further.”
When investors are concerned about inflation, their appetite for buying bonds decreases because the return on their investment is less when inflation is high. Inflation erodes the value of a bond’s future payments. Less demand causes bond prices to fall and interest rates to rise. Since mortgage rates tend to follow the same path as the 10-year Treasury rate, they are also rising.
The yield on the 10-year Treasury rose back to 3.42 percent on Tuesday before falling to 3.41 percent on Wednesday, the highest level since mid-June.
“The higher-than-expected CPI gave the Fed permission to push forward with their 0.75 percentage point increase, with some economists suggesting that even a one percentage point increase would be viable,” said Nicole Rueth, producing branch manager at the Rueth Team. “Mortgage rates have already baked into this move with the jump we’ve seen over the last two days.”
Mortgage rates may not have peaked yet, Rueth said.
“Comparative inflation from a year ago means we are still replacing very low inflation in September 2021,” she said. “With today’s inflationary pressures … we could see September’s CPI – released in early October – still higher. Inflation in October 2021 started the trend higher, so year-on-year comparisons will give us some relief. When inflation falls, mortgage rates will also fall.”
An earlier version of this story said the consumer price index for housing costs saw its biggest increase since 1991. That’s the biggest increase since 1990.