Bad news for home buyers: Mortgage rates have soared to their highest levels since March 2020

Interest rates are rising in the wake of data showing a worrying inflation outlook – and homebuyers are willing to pay the price.

The 30-year fixed-rate mortgage averaged 3.45% for the week ending January 13, up nearly a quarter of a percentage point from the previous week, Freddie Mac
reported on Thursday. It’s the highest 30-year average loan rate since March 2020, as the coronavirus pandemic sent the first shock waves through financial markets amid the first wave of lockdowns.

Relatively speaking, a year ago, the average 30-year flat rate mortgage was 2.23%, near record lows.

Meanwhile, the 15-year fixed-rate mortgage rose 19 basis points over the past week to an average of 2.3%. The average 5-year Treasury-adjusted adjustable mortgage was 2.57%, up 16 basis points from the previous week.

“The Fed has accelerated its schedule to end quantitative easing and is likely to start raising interest rates sooner and more aggressively than previously expected.”

Sam Pollard, Wells Fargo

The Consumer Price Index released on Wednesday showed that inflation was at its highest level in nearly 40 years, with prices of goods and services rising 7% over the past year.

This high rate of inflation is a major concern for the Federal Reserve, which has already indicated that it will raise interest rates and reduce bond-buying activity in an effort to keep the economy on hold. But the central bank’s initial plan may now be out the window.

“With inflation continuing, the Federal Reserve has accelerated its schedule to end quantitative easing and is likely to start raising interest rates sooner and more aggressively than previously expected,” said Sam Pollard, managing director and chief economist at the firm and investment. The banking arm of Wells Fargo WFC,
In a research note.

Bullard predicted that the Fed might raise interest rates four times, instead of the three previously expected. Rather than simply halting bond-buying activity, he said, the central bank could actually start shrinking its balance sheet by not exchanging US Treasuries and mortgage-backed securities as they mature.

A rate hike by the Fed will not have a direct impact on mortgage rates, as they tend to follow the trend of long-term bond yields such as the 10-year Treasury TMUBMUSD10Y,
Instead, higher rates will come when investors start making assumptions about the Fed’s plans to curb inflation.

Economists have pointed out that higher rates are unlikely to cause homebuyers to fully put the brakes on their property purchase plans. But it will have an impact on profit margins for buyers who may struggle to withstand the double whammy of higher interest rates and higher home prices.

“The rise in mortgage rates so far this year has not yet affected purchase demand, but given the rapid pace of home price growth, demand is likely to weaken in the near future,” said Sam Khater, chief economist at Freddie Mac. in the report.


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