Home News Mortgages hit 14-year high as Fed hikes rates to curb inflation

Mortgages hit 14-year high as Fed hikes rates to curb inflation

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Mortgage rates soared this week, the highest level since 2008. Unexpectedly rapid escalations have a chilling effect on the US housing market, increasing pressure on the economy, which is already plagued by constant inflation.

The most popular mortgage product, the 30-year fixed-rate mortgage, jumped to 5.78% this week, up from 5.23% a week ago, according to Freddie Mac data released Thursday. The rise of more than half a percent was the largest weekly rise since 1987. The rise has come in anticipation of this week’s Fed rate hike. The Fed has raised interest rates at the fastest pace since 1994 to curb inflation spikes.

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Consumers face higher prices in almost every aspect of their lives. Currently, mortgage rates are high, limiting or fully priced housing options. A week ago, a $ 300,000 loan with a 30-year fixed-rate mortgage at a 5.23% interest rate cost the borrower about $ 1,653 a month, excluding other costs such as taxes and insurance. The tree economist Jacob Channel writes. on mail. This week, the same loan costs $ 1,756 a month, or 5.78%. That’s an additional $ 103 a month, $ 1,236 a year, and $ 37,080 over the entire loan period.

The housing boom, supported by low interest rates, is beginning to subside. Prices haven’t eased yet and are rising, mainly due to low inventories. According to the latest Case-Shiller Home Price Index, home prices in March rose 20.6% year-on-year. However, sales are sluggish. Existing home sales, the latest data available from the National Association of Real Estate Agents, fell for the third straight month in April. Housing starts have fallen 14.4% since April, down 3.5% year-on-year, according to Census Bureau data released Thursday.

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In addition to lowering sales of new and existing homes, higher interest rates have curbed the desire for mortgages. Volume has decreased by more than 50% compared to a year ago. The refinancing share of mortgage applications is at the second lowest level since December 2000.

As a result, real estate and mortgage brokers are abandoning their jobs. Compass has reduced non-broker staff by 10% and Redfin has announced that it will dismiss approximately 470 employees. Pennymac Financial Services, a non-bank mortgage lender, has reduced 207 employees after reducing 230 employees in March.

The housing cooldown is due to the Federal Reserve raising the benchmark rate by 0.75 percentage points. This is the Fed’s third rate hike this year. At the May meeting, the central bank raised the federal funds rate by 0.5 percentage points. In March, when we raised the benchmark rate for the first time since 2018, we took the first step to lower inflation.

The Fed does not set interest rates on mortgages, but their behavior affects mortgages. The central bank has launched this initiative to reduce non-mortgage lending losses in order to curb the highest inflation in 40 years and reduce demand for goods and services.

Holden Lewis, NerdWallet’s Home and Mortgage Specialist, said: “The Federal Reserve has raised short-term interest rates to slow economic growth and curb inflation.”

“In response to last week’s inflation data, mortgage rates continued to rise this week in anticipation of a rise in federal funds rates this week,” said Hannah Jones, an economic data analyst at Realtor.com. “While Freddie Mac’s tracked interest rate remains at 5, other mortgage surveys have shown interest rates above 6% earlier this week,” she said.

Yields on long-term bonds rose this week, largely because investors expected positive moves. The Treasury yield for 10 years rose to its highest level in more than 10 years, reaching 3.49% on Tuesday and returning to 3.33% after the Fed’s announcement. The yield at the beginning of the year was 1.63%.

“30-year mortgage rates tend to follow the 10-year Treasury yield, and the 10-year Treasury reached the highest yield in 11 years,” said Steve Reich, Chief Operating Officer of the Finance of America Mortgage. I wrote in. “10-year government bonds are rising as investors anticipate future interest rates. As a result, mortgage rates have recently followed suit and are rising. In the short term, mortgage rates will continue to rise. It’s likely to continue. To the same extent, keep pace with the 10-year Treasury yield. “

Lewis expects mortgage rates to be less volatile in the near future.

“The mortgage rates tend to rise and fall in anticipation of the Fed’s rate hike, which indicates that the Fed’s rise has already been incorporated into mortgage rates,” he said. “In other words, mortgage rates are more likely to fluctuate before the Fed’s meeting than after the Fed’s meeting. The next week or two will not see as much mortgage rates as last week. “.

Federal Reserve Chair Jerome Powell said in a press conference after the press conference that he doesn’t think this scale of movement is common, but the Fed could rise another 0.75 percentage points next month. Suggested that there is.

“Given the rise in consumer prices last week to its 40-year high, it’s very likely that the Fed will raise inflation at a faster pace than originally expected and raise interest rates,” Reich said. It is written. “Depending on where the Fed’s inflation is, interest rates may fall by the end of the year, but mortgage rates are expected to continue to rise over the coming months.”

Low interest rates have helped boost the resurgence of the US housing market after the Great Recession and push home prices to record levels. But after the pandemic hit a record low, rates are weeping. The 30-year fixed average, which started the year at 3.22%, reached 4% in March and 5% after 5 weeks. Economists expected interest rates to rise, but escalated much faster than expected.

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