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Mortgage rates hit 5 percent for first time since 2011

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Mortgage rates are rising rapidly, surpassing 5% for the first time in more than a decade, and are beginning to curb the booming housing market.

Freddie Mac reported Thursday that its 30-year fixed rate average, its most popular mortgage product, has reached new standards this week. It hasn’t been this high since February 2011.

Low interest rates have helped boost the resurgence of the US housing market after the Great Recession and push home prices to record levels. However, after hovering for two years at historically low prices, interest rates have fallen. The fixed average for the 30 years in January was 3.22 percent. A year ago it was 3.04 percent.

Mortgage rates were expected to rise, but the rise was faster than many economists expected. Inflation has spurred on and interest rates have skyrocketed.

Inflation, which has hit consumers in their daily lives, is also a pain for homebuyers.A few months ago, homebuyers were considering paying $ 1,347. Monthly with a $ 300,000 loan at 3.5%. If the buyer has been waiting until this week, the same 5% loan will increase monthly payments by $ 263 to $ 1,610.

Federal Reserve efforts to curb inflation are driving interest rates to rise. The Fed does not set mortgage rates, but it does affect mortgages. The central bank took the first step to lower inflation in early March, when it raised benchmark interest rates for the first time since 2018. The Federal Reserve will soon begin the process of lowering its balance sheet, in addition to raising rates for the Federal Reserve.

The Federal Reserve holds approximately $ 2.74 trillion in mortgage-backed securities. At the May meeting, he announced plans to reduce his holdings. The more aggressively the Fed sells these bonds, the faster mortgage rates can rise.

Housing costs don’t just affect buyers and sellers. It has also proven to be a major economic recovery problem, potentially jeopardizing the ability of policy makers to curb inflation that is pervasive throughout the economy.

Inflation is rising at the fastest pace in 40 years and prices are rising climbing March was 8.5% year-on-year. Shelter is the majority (about one-third) of the basket of goods and services used to calculate inflation, known as the “consumer price index.” This means that if housing costs don’t turn around in a meaningful way right away, it will be much harder for overall inflation to boil down to more normal levels.

Shelter costs also differ from other power-sensitive categories such as gas, food, plane tickets, ongoing pandemics, supply chain disruptions, and wars.

Gas and energy prices are unlikely to remain high, for example, when Russia invaded Ukraine and had enormous consequences for the global energy markets. Food can also be cheaper as the supply chain becomes smoother over time.

But those forces do not apply to housing costs as well. Landlords who can fix higher rents are unlikely to lower prices a year later. Buyers continue to seek some homes available. Also, as the housing market is supercharged by competitive bidding wars and full cash offers, it is unclear how much demand must cool before housing costs can recover significantly.

Even Fed officials are on the wave. This week, Fed Governor Christopher Waller said he sold his home in St. Louis to a full cash buyer without inspection.

“The national housing market is incredible,” Waller said. Said At a community listening session hosted by the Fed on Monday.

It was the Fed’s actions during the pandemic that pushed down mortgage rates. The 30-year fixed average bottomed out at 2.65% in January 2021. By lowering the federal funds rate to near zero and buying mortgage-backed securities with the Ministry of Finance to support the economy, the central bank has entered an era of cheap mortgages.

As borrowing became cheaper, home prices rose as buyers could afford to spend more on their homes. The latest Case-Shiller Housing Index shows that January prices rose 19.2% year-on-year. Phoenix, Tampa, and Miami saw increases of 32.6 percent, 30.8 percent, and 28.1 percent, respectively.

Prices should ease, but rising interest rates continue to challenge affordability. And while higher rates are expected to delay home purchases over time, the factors that led to the home boom remain. Inventories are low and demand remains high.

“Buyer activity has already slowed in terms of lower home sales,” said Lisa Startebant, a housing market analyst in Alexandria, Virginia. I think there will probably be a pretty strong spring as people are about to enter before people think interest rates will be even higher. “

With rising interest rates, the 2020 and 2021 mortgage market boom slowed this year. Refinancing applications have dropped to the lowest level since 2019. The Mortgage Bankers Association predicts that overall origins will decline by more than 35% this year. Purchase origination is expected to increase by 4%, while refinancing origination is expected to decrease by 64%.

“A surge in mortgage rates will slow the housing market and further reduce refinancing demand for the rest of the year,” MBA Chief Economist Mike Fratantoni said in a statement. “Rising home prices and interest rates, as well as continued supply constraints, are expected to reduce existing home sales each year.”

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