Mortgage rates top 5 percent for the first time in decade

The interest rate for the 30-year fixed-rate mortgage hit a 10-year high of 5 percent on Thursday, continuing steep inclines that started last December in an American housing market where values are surging.

The rate on the most popular U.S. mortgage has climbed nearly 2 points from 3 percent a year ago, according to the latest numbers from mortgage administrator Freddie Mac. The last time the 30-year fixed rate mortgage hit 5 percent was February 2011.

Fifteen-year fixed-rate mortgages averaged 4.17 percent this week, up from 3.91 percent last week and 2.35 percent a year ago.

“This week, mortgage rates averaged five percent for the first time in over a decade,” said Sam Khater, Freddie Mac’s chief economist. “As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation.”

Adjustable rate mortgages have also spiked, with the five-year standard Treasury-indexed mortgage averaging 3.69 percent, up from 2.8 percent last year.

As a result of the spiking rates, the mortgage market is experiencing a dip of activity, according to information from the Mortgage Bankers Association (MBA) trade group, as potential homeowners reconsider buying houses and investing in real estate.

A mortgage market index from the MBA shows loan application volumes decreased 1.3 percent compared to a week earlier. Home refinancing application volumes dipped 5 percent on the week and were down 62 percent compared to the previous year.

“The rapid increase in rates, caused by a much more rapid pace of rate hikes and balance sheet reduction from the Federal Reserve, is in response to the booming job market and inflation being at a 40-year high,” Mike Fratantoni, an economist with the MBA, said in a statement. “The jump in mortgage rates will slow the housing market and further reduce refinance demand the rest of this year. Higher home prices and rates as well as ongoing supply constraints are now expected to lead to an annual decline in existing home sales.”

In addition to high interest rates, home sales are also facing elevated prices in the real estate market due to the pandemic, as well as supply shortages for building materials as part of larger supply chain disruptions that are contributing to inflation.

“Elevated inflation continues to push up mortgage rates,” Nadia Evangelou, an economist with the National Association of Realtors (NAR), said in a statement. The higher rates “added about $400 to the monthly mortgage payment for a median-priced home. This means that potential buyers need to spend more of their budget on housing to buy the typical home.”

Wage data released this week by the Department of Labor saw real earnings decrease by 2.7 percent from March of last year. The change in earnings combined with a dip of 0.9 percent in the length of the average workweek resulted in a 3.6-percent decrease in real average weekly earnings over the last year.

“Comparing inflation with real wage growth since 2008, this is the first time that inflation has risen so much faster than wages,” Evangelou said. “With rising borrowing costs, expect about 16 million households to be priced out of the market this year. As a result, NAR forecasts home sales activity to drop about 10 percent in 2022.”

Housing affordability declined in February, according to an index compiled by NAR. Compared to a year ago, the group found the average mortgage payment increased by more than 30 percent, while median family income rose by only 3.6 percent.

To combat inflation, some analysts have suggested the Federal Reserve could increase interest rates by as many as six times this year, bringing the Federal Funds rate as high as 1.9 percent by the end of the year. The risk of such a hike is a contraction in the economy, but with inflation as a driver of recession itself, most analysts see the Fed as not having much of a choice.

“The twin shocks of the war in Ukraine and the build-up of momentum in elevated U.S. and Europe inflation will lead to a recession in the U.S. and a growth recession in the euro area within the next two years,” researchers at Deutsche Bank forecasted earlier this month.

“More troubling, especially in the U.S., are signs that the underlying drivers of inflation have broadened, emanating from very tight labor market conditions and spreading from goods to services,” the company said. “The forecast is for inflation to recede to more desired levels over the next several years assuming there are no other geopolitical or other supply shocks and that central banks take action, just in time, to keep inflation expectations anchored. Should these assumptions prove incorrect, inflation pressure, central bank tightening, and economic downturns could all be more intense than baseline projections.”