Mortgage Rates

Inflation, Fed motion set stage for increased mortgage charges – Orange County Register


From Alex Veiga | The Associated Press

Mortgage rates hovered near all-time lows for much of the year, although inflation rose sharply across much of the economy.

That could change in the coming weeks after the Federal Reserve signaled that it could announce plans as early as next month to roll back the measures it took to prop up the economy during the pandemic.

It is widely expected that the Fed will announce a schedule for reducing its monthly bond purchases at its next meeting in early November. These bond purchases have helped keep mortgage rates extremely low for the past 18 months.

The 10-year government bond yield has risen steadily since the central bank’s last policy update in mid-September, hitting 1.64% this week. Home loan interest rates, which tend to follow 10-year government bond yields, have also risen.

According to Freddie Mac, the average 30-year mortgage rate rose to 3.09% this week, its highest level since April when it peaked at 3.18%. A year ago the rate averaged 2.8%.

Signals from the Fed and signs that inflation will remain pervasive are creating the conditions for mortgage rates to rise even further in the coming months, say economists.

“The biggest impact is that the Federal Reserve is ready to cut its bond purchases as early as next month,” said Greg McBride, Bankrate’s chief financial analyst. “However, inflation is likely to be the biggest determinant of what happens to mortgage rates in the months ahead. Whether they go higher or not, and if so, how much higher. “

McBride expects long-term mortgage rates to average between 3% and 4% over the next 12 months.

That corresponds to a forecast this week by the Mortgage Bankers Association that the average interest rate on a 30-year fixed-rate mortgage is to expire at 3.1% this year and then increase to 4% by the end of next year.

Southern California home prices hit a record high of $ 688,500 in September, although the pace of price increases appears to be slowing, DQ News / CoreLogic reported on Wednesday, October 20. (File Photo: Jebb Harris, Orange County Register)

The National Association of Realtors also anticipates an increase in interest rates to 3.5% by mid-2022.

“The Fed is likely to hike rates by the middle of next year,” wrote Nadia Evangelou, senior economist at the NAR, in an inflation analysis last week. “If the Fed raises interest rates, so do the banks. And when that happens, borrower’s mortgage rates go up. “

Last December, the Fed announced that it would add $ 120 billion a month to bond purchases to stimulate borrowing and spending by keeping longer-term interest rates low.

The central bank has also left its short-term policy rate at near zero, but rising inflation has put pressure on the Fed to reverse its low interest rate policy.

The consumer price index, an important measure of inflation, rose 5.4% yoy in September, the largest increase since 2008.

Inflation has historically been lower than the average interest rate on a 30-year mortgage. But since April inflation has been above the average long-term mortgage rate. The last time inflation was higher than the average 30-year home loan rate was in August 1980, according to the Federal Reserve.

With mortgage rates bottoming – the average 30-year mortgage rate hit an all-time low of 2.65% in the first week of January – it is unlikely that any hike will throw the highly competitive US housing market off course. But it still means that aspiring homeowners will have less purchasing power. It also means that homeowners considering refinancing may miss out on their chance to get a lower interest rate.

“The lowest lows may be in the rearview mirror, but mortgage rates are now still lower than anything seen before summer 2020,” McBride said. “If you haven’t refinanced yet, do so now. The likelihood is that we will see higher, not lower, rates in the months ahead. “

The volume of mortgage refinancing has slowed in recent months after rising sharply over the past year. Mortgage refinancing accounted for 70.7% of home loans made in the first three months of this year, according to the MBA. The share fell to 56% in the second quarter and to 55% in the third.

The MBA predicts that mortgage refinancing will decrease 62% to $ 860 billion next year, from $ 2.26 trillion this year.

Even with higher mortgage rates, the housing market is expected to remain highly competitive in relation to demand given the lack of homes for sale. As a result, the MBA expects home purchase mortgages to grow 9% to a record $ 1.73 trillion over the next year.

Good side for homebuyers, if demand for mortgage refinancing continues to slow, banks looking to make up for lost revenue may be more willing to cut fees to attract potential homebuyers to a mortgage.