The Mortgage Rates Are Surging Toward 7% Again. Another Sign Inflation Isn't Slowing.

Last week, the number of mortgage applications fell further as rates increased. The fact that 7% mortgage rates are once again in the picture is not good for the spring selling season.

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According to the Mortgage Bankers Association, a key indicator of buyer demand dropped to a 28-year low last week as mortgage rates increased. The trade association reported a 6% decrease from the prior week in its seasonally adjusted gauge of loan applications for house purchases.

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It's evidence that buyer demand is being affected at a time when the housing market is typically active by rising mortgage rates, which have risen in recent weeks in response to hotter-than-expected economic indicators.

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“While mortgage rates dropped to 6.2 percent in January, application activity has declined for three straight weeks as mortgage rates have increased 50 basis points over the past month,” said Joel Kan, the trade group's deputy chief economist. 

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The market's response to a hotter-than-expected January jobs data set off a spate of rate increases, the most recent of which occurred last week. "Inflation may not be decreasing as soon as anticipated, which continues to put upward pressure on rates," Kan said in a release. Statistics on inflation, employment, and economic activity have also indicated this.

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One carefully followed indicator of mortgage rates, the Primary Mortgage Market Survey from Freddie Mac FMCC -1.53%, was 6.65% as of Thursday, data released at midday, up from 6.5% last week. That was the highest average 30-year fixed rate recorded in the poll since November 2022, marking the fourth straight gain.

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Reduced mortgage rates in January encouraged buyers to return to the market, according to a statement from Freddie Mac's senior economist Sam Khater. "Affordability is a barrier now that rates are rising, making it difficult for potential purchasers to act, especially for repeat buyers with previous mortgages at less than half of current rates," says the report.

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Although Freddie's gauge fell short of 7%, more recent daily rates as determined by other publishers have come close to—or even surpassed—7%. Large home loan originator Rocket Mortgage offered 30-year fixed rates at 7.25% on Wednesday in the afternoon, while Mortgage News Daily's poll put the rate at 6.94%. 

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Depending of the measurement you use, interest rates are once more approaching the 7% barrier, writes Keith Gumbinger, vice president of the mortgage website HSH.com, in an email. Mortgage rates, as reported by Freddie Mac, peaked in October and November of 2022 at 7.08%. Regardless of the source, all indications lead to higher rates this week than last, and this week we'll probably be a little bit closer to the cycle highs than not, according to Gumbinger.

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Following increases in the 10-year Treasury yield, which rose this week as investors anticipated a more hawkish Federal Reserve in the central bank's fight against inflation, mortgage rates have recently increased.

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Wednesday at 3:00 p.m. The 10-year Treasury yield, which frequently affects how much mortgage rates fluctuate, peaked at 3 p.m. at 3.994%. according to Dow Jones Market Statistics, yield since November 9, 2022. The yield increased further on Thursday morning, rising to 4.066%.

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According to Freddie Mac's Khater, "when we started the year, the 30-year fixed-rate mortgage declined with forecasts of lower economic growth, inflation, and an easing of monetary policy. But because of the ongoing economic expansion and inflation, mortgage rates have taken a turn for the worst and are already creeping up to 7%.

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The last time interest rates went above 7%, the home market suffered. The residential real estate market was essentially frozen in November, Lawrence Yun, the chief economist for the National Association of Realtors, said at the time. "In essence, the residential real estate market was frozen, resembling the sales activity seen during the Covid-19 economic lockdowns in 2020," he added. The primary contributing element, which harmed housing affordability and diminished incentives for homeowners to offer their properties, was the quick rise in mortgage rates.

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The Mortgage Bankers Association's gauge of mortgage application activity has decreased, just as it did the last time rates were close to 7%. The headwind this time around begins at the beginning of the generally hectic spring house purchasing season.

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Lower borrowing rates in December and January did give a little hope that business might go up, but Gumbinger said that this spring season was already looking to be quite difficult. "The recent spike in mortgage rates will probably make some hopeful buyers reconsider their decision."

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Selma Hepp, chief economist at CoreLogic, notes that sellers, particularly those who locked in historically low mortgage rates early in the pandemic, could potentially opt out. Nobody likes instability, especially when it comes to purchasing a property, according to the economist.

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Hepp claims that as economic conditions clear up in the second half of the year, mortgage rate volatility should decrease. "More certainty about the economy's prospects and the Federal Reserve's actions will result from greater clarity," 

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According to HSH's Gumbinger, signals of a cooling labor market and softening inflation could assist cut mortgage rates in the interim, but indications of a resilient labor market or persistent inflation could raise them. The Fed is "in play" for additional rate hikes and for rates to stay higher for a longer period of time, according to Gumbinger, when there is too much economic strength, too much inflation, or too tight labor markets.

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Increased mortgage rates may result in higher housing prices for prospective homebuyers financing their purchase, but Gumbinger thinks there is some good news as well. Prospective borrowers may have a little bit more options, experience less competition, and have more time to think through their purchase, he claims. "It is still a "seller's market," but less so."