Mortgage rates hit higher levels since spring 2020

U.S. mortgage rates hit their highest levels since May 2020 this week, pushing up the costs associated with buying a home at a time when home selling prices are already near record highs.

The average rate on a 30-year fixed-rate loan was 3.22%, down from 3.11% last week, according to mortgage finance giant Freddie Mac. A year ago, mortgage rates stood at 2.65%.

Ultra-low interest rates have been a major force in the real estate boom of the past two years. Households that kept their jobs and saved money during the pandemic took advantage of low borrowing costs to purchase larger homes that could accommodate work or home study. Purchases of second homes and investor demand for rental properties have also increased.

With the number of homes for sale well below normal levels, buyers clashed in bidding wars, pushing prices to new highs. The median price of existing homes rose 13.9% in November from the previous year to $ 353,900, according to the National Association of Realtors. That month, the median selling price of newly built homes hit an all-time high.

Mortgage rates are still low by historical standards, and with strong buyer demand for homes, housing economists are not predicting an immediate or significant drop in home sales. Existing home sales rose in November to the highest seasonally adjusted annual rate since last January, and 2021 was on track to be the strongest year for home sales since 2006.

But with the Federal Reserve set to hike short-term interest rates this year, mortgage rates are expected to accompany them higher, making housing affordability an even greater challenge.

“Rates are really the biggest risk to the market,” said Ivy Zelman, managing director of real estate research and consulting firm Zelman & Associates.

A 3.22% rate on a $ 300,000 loan would create a monthly payment of about $ 1,300, according to LendingTree Inc.,

an online loan information site. At 2.65%, where the average mortgage rate was a year ago, the monthly payment would be $ 1,209. (Both figures exclude taxes and insurance).

If interest rates continue to rise, existing homeowners are likely to be less inclined to sell their current home and buy a new one if they have already stuck on low rates.

“I think a 4% mortgage rate would kill the housing market,” Ms. Zelman said. “So many people are stuck below this rate, and that is really what matters.”

NAR predicts the 30-year fixed mortgage rate will hit 3.7% by the end of 2022, a lending rate that industry group economists say is still low enough to keep the housing boom going.

“Housing demand is expected to remain robust this year,” said Nadia Evangelou, senior economist and director of forecasting at NAR. “While the housing market is likely to calm down, it will still outperform compared to the pre-pandemic period.”

Rising rates may also dampen the refinancing boom that has boosted mortgage lenders since the spring of 2020. When rates rise, fewer homeowners can lower their monthly payments by refinancing.

Mortgage rates in recent days have followed the sharp rise in US Treasury yields, which have set a floor on borrowing costs across the economy. The yield on the benchmark 10-year US Treasury bond stood at 1.733% Thursday, according to Tradeweb, compared to 1.496% last Friday.

Yields began to rise sharply on Monday, a sign that investors were placing new bets on the Federal Reserve’s rate hikes, reflecting expectations that the U.S. economy will continue to expand and that authorities will work to reduce the rate. inflation. Yields got a further boost on Wednesday, when the minutes of the December Fed meeting showed officials were considering a quicker timetable to raise rates this year.

Fed funds futures showed on Thursday that investors believe there is a 75% chance the Fed will hike rates by its March meeting. They showed a nearly 50 percent chance that the central bank will hike rates by at least four quarter-percentage-point increments this year.

Treasury yields could have room for improvement as they are still based on expectations that the Fed will not hike rates as high as officials have indicated they think is likely, the officials said. analysts and portfolio managers.

Many investors and analysts are skeptical of the ability of the Fed to raise rates to very high levels. A report by analysts from Bank of America last year concluded that, given the amount of debt currently in the economy, the 10-year yield could remain below 2.5% and still incur the same total cost of debt than in 2018, when the yield exceeded 3%. .

As mortgage rates remain near record lows, lower refinances are expected to hit nonbank mortgage lenders harder than their counterparts at the big banks, which are releasing fourth quarter results from next week. Since the 2008 financial crisis, banks have moved away from the mortgage market.

Americans borrowed a record $ 1.61 trillion to buy homes in 2021, according to Mortgage Bankers Association estimates, up from $ 1.48 trillion in 2020.

Write to Nicole Friedman at [email protected], Orla McCaffrey at [email protected] and Sam Goldfarb at [email protected]

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