“Mortgage Rates Take Buyers on a Roller Coaster Ride: Where Will They End Up?”

Short:

1. Mortgage rates are increasing, and it is affecting the US housing market.
2. The inflation rate is high, but it is slowing, and analysts predict a slower economy over the next few quarters, which will decrease inflation rates.
3. Higher mortgage rates are causing lending standards to be stricter, making it more difficult for some home shoppers to secure funding.
4. The housing market is slowing down due to tighter monetary policies, and this is expected to continue.
5. The time it takes to sell homes could increase as buyers hesitate, and for borrowers, tighter conditions may make it more difficult to secure funding.
6. Rates are expected to retreat through this year, benefiting mortgage borrowers, as the housing market was the first sector to slow due to tighter monetary policies.

Brief:

Mortgage rates have been on a roller coaster ride this year, and it’s only March. Typically, home buyers can expect mortgage rates to move down through the rest of the year as the banking crisis drags on, which could help to cool down inflation. However, there are bound to be some bumps along the way, as seen in recent months. This article explores the reasons behind the ups and downs of mortgage rates and where they could end up.

The Federal Reserve’s Impact on Mortgage Rates

After steadily rising last year as a result of the Federal Reserve’s campaign to rein in inflation, the average rate for a 30-year fixed-rate mortgage topped out at 7.08% in November 2022, according to Freddie Mac. Then, with economic data suggesting inflation was retreating, the average rate drifted down through January 2023.

But a raft of robust economic reports in February brought concerns that inflation was not cooling as quickly or as much as many had hoped. As a result, after falling to 6.09%, average mortgage rates climbed back up, rising half a percentage point over the month.

Then, in March 2023, banks began collapsing. That sent rates falling again. Neither the actions of the Federal Reserve nor the bank failures directly impact mortgage rates. But rates are indirectly impacted by actions that the Fed takes or is expected to take, as well as the health of the broader financial system and any uncertainty that may be percolating.

On Wednesday, the Federal Reserve announced it would raise interest rates by a quarter point as it attempts to fight stubbornly high inflation while taking into account recent risks to financial stability. While the bank failures made the Fed’s work more complicated, analysts have said that, if contained, the banking meltdown may have actually done some work for the Fed, by bringing down prices without raising interest rates. To that point, the Fed suggested on Wednesday that it may be at the end of its rate hike cycle.

Mortgage Rates and 10-Year US Treasury Bonds

Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does, and investors’ reactions. When Treasury yields go up, so do mortgage rates, and when they go down, mortgage rates tend to follow.

Following the Fed’s announcement on Wednesday, bond yields, and the mortgage rates that usually follow them, fell. But the relationship between mortgage rates and Treasurys has weakened slightly in recent weeks, said Orphe Divounguy, senior economist at Zillow. “The secondary mortgage market may react to speculation that more financial entities may need to sell their long-term investments, like mortgage-backed securities, to get more liquidity today,” he said.

Even as Treasurys decline, he said, tighter credit conditions as a result of bank failures will likely limit any dramatic plunging of mortgage rates. “This could restrict mortgage lenders’ access to funding sources, resulting in higher rates than Treasuries would otherwise indicate,” Divounguy said. “For borrowers, lending standards were already quite strict, and tighter conditions may make it more difficult for some home shoppers to secure funding. In turn, for home sellers, the time it takes to sell could increase as buyers hesitate.”

Longer Term Outlook

Inflation is still quite high, but it is slowing and analysts are anticipating a much slower economy over the next few quarters, which should further bring down inflation. This is good for mortgage borrowers, who can expect to see rates retreating through this year, said Mike Fratantoni, Mortgage Bankers Association senior vice president and chief economist.

“The housing market was the first sector to slow as the result of tighter monetary policy and should be the first to benefit