U.S. mortgage rates approached 5% on Friday, the highest daily average in more than four years, as war-worsened inflation fears spooked financial markets and the Federal Reserve ended a two-year emergency program that boosted demand for bonds containing home loans.
The average locked rate for a 30-year fixed mortgage eligible to be backed by Fannie Mae and Freddie Mac – the most common form of home financing – rose to 4.87% on Friday, the highest since late 2018, after rising a third of a percentage point in a week, according to data from Optimal Blue. The average 30-year jumbo rate increased to 4.4%, the highest since 2019.
Mortgage rates are surging after the Fed ended an asset-purchasing program this month that had been aimed at keeping credit flowing during the pandemic. When demand for bonds softens, investors are able to demand higher yields, putting upward pressure on mortgage rates.
Inflation, which eats into fixed-asset returns, is also a factor, said Mark Goldman, a senior loan officer with C2 Financial Corp. in San Diego.
Often, turmoil overseas causes global money managers to pile into the perceived safety of U.S. bond markets, which can push mortgage rates lower – as happened during the UK’s Brexit crisis, he said. But, because Russia’s invasion of Ukraine sent energy costs soaring, it’s having the opposite effect as investors demand higher yields to compensate for the inflationary pressures.
The new spike in fuel prices comes on top of inflation data earlier this month showing U.S. prices were increasing at the fastest pace in four decades after two years of supply-chain bottlenecks caused by the covid-19 pandemic.
“Inflation is the enemy of interest rates,” said Goldman. ”When there is an expectation of higher inflation, interest rates go up.”
Perhaps highest in the minds of bond investors, who influence loan rates by the yields they are willing to accept for mortgage-backed securities, is what the Fed’s next steps will be, he said.
“One of the big concerns is how quickly will the Fed unload their mortgage and Treasury bonds,” Goldman said. “They have this huge inventory of them, and the market is already trying to price in what it thinks may happen when the Fed starts selling those securities.”
For much of the last two years, the Fed bought $120 billion of bonds a month to prevent the type of credit crunch that sank the economy in 2008.
The monthly purchases included $80 billion of Treasuries and $40 billion of so-called agency mortgage-backed securities – meaning bonds containing home loans backed by Fannie Mae, Freddie Mac, and Ginnie Mae, the securitizer for loans backed by the Federal Housing Administration and the U.S. Department of Veterans Affairs.
Having the Fed as the bond market’s biggest buyer sent mortgage rates plummeting to new lows in 2020, fueling a real estate boom that caused home prices to skyrocket in 2021. The median price of a previously owned home jumped 17% last year, the biggest annual gain on record, according to the National Association of Realtors.
The nearly $6 trillion in bond purchases over the past two years sent the Fed’s balance sheet soaring to record highs. The central bank now holds $8.5 trillion of securities, according to a release last week, including $5.8 trillion of Treasuries and $2.7 trillion in mortgage-backed securities.
The pace the Fed sets for its balance-sheet reduction will influence yields on the 10-year Treasury, a benchmark for mortgage-bond investors, as well as the yields on mortgage-backed securities.
Details about the plan to sell assets will begin emerging on April 6, when the policy-setting Federal Open Market Committee releases its minutes, Fed Chairman Jerome Powell said at a March 16 press conference. The reductions could begin as early as the FOMC’s next gathering, being held on May 3 and 4, he said.
“At our meeting that wrapped up today, the committee made good progress on a plan for reducing our securities holdings, and we expect to announce the beginning of balance sheet reduction at a coming meeting,” Powell said at the press conference. “In making decisions about interest rates and the balance sheet, we will be mindful of the broader context in markets and in the economy, and we will use our tools to support financial and macroeconomic stability.”
While Powell sought to reassure financial markets with pledges of “stability,” the pace of mortgage rate increases already has surpassed the outlook of all the major housing forecasters, including Fannie Mae, Freddie Mac, the National Association of Realtors, and the Mortgage Bankers Association. Friday’s four-year high in the average rate for a 30-year fixed conforming mortgage was 1.5 percentage points higher than the level seen at the beginning of the year, according to Optimal Blue data.
While there’s always uncertainty when predicting economic data points, including bond yields and mortgage rates, we live in a time of extra uncertainty because of the war in Ukraine, Powell said.
“The implications of Russia’s invasion of Ukraine for the U.S. economy are highly uncertain,” Powell said. “In addition to the direct effects from higher global oil and commodity prices, the invasion and related events may restrain economic activity abroad and further disrupt supply chains, which would create spillovers to the U.S. economy.”