‘Pandemic boom in home sales is over’: Mortgage rates rise to highest since 2009 as Fed squeezes housing market

Mortgage rates are skyrocketing thanks to the Fed, but buyers who weather this tough, changing market will be rewarded.

The 30-year fixed-rate mortgage averaged 5.27% for the week ended May 5th. according to published data by Freddie MacFMCC,
on Thursday. That’s 17 basis points up from the previous week – one basis point equals one-hundredth of a percentage point, or 1% of 1%.

This marks the highest level since August 2009 for the benchmark 30-year mortgage product. To put that in context, the last time Barack Obama had mortgage rates this high was just months into his first term as President, the nation was devastated by the Great Recession and Instagram had yet to launch.

The last time mortgage rates were this high was Barack Obama just months into his first term as president, the nation was in the midst of the Great Recession and Instagram had yet to be launched.

The average interest rate on the 15-year fixed-rate mortgage rose 12 basis points last week to 4.52%. The 5-year Treasury-indexed adjustable-rate hybrid mortgage averaged 3.96%, up 18 basis points from the previous week.

Mortgage rates are roughly based on the yield on the 10-year TMUBMUSD10Y Treasury note,
But the difference between the average interest rate on the 30-year mortgage and the 10-year Treasury has recently widened.

Since the end of the Great Recession, the spread between the two has averaged 1.7 percentage points, but is currently hovering over 2%. If the spread were closer to historical levels, the 30-year fixed-rate mortgage would still be below 5%.

According to an analysis by Odeta Kushi, deputy chief economist at title insurer First American FAF, the Federal Reserve is largely to blame for mortgage rates rising faster than might otherwise be expected.
Investors buying mortgage-backed securities have already factored in the expectation that the US Federal Reserve will hike rates again this year to assess the mortgage market.

Consequently, lenders must increase the interest rates they offer consumers so that they can continue to sell their loans to investors – these sales generate the funds used to make more mortgages.

“While additional Fed tightening is already burned into today’s average mortgage rates, ongoing inflationary pressures are likely to push mortgage rates even higher in the coming months,” Kushi said.

Raising short-term interest rates isn’t the only way the Fed is affecting the mortgage market. The central bank itself has been a buyer of mortgage-backed securities since the pandemic began. Now that the Fed is about to shrink its bond balance sheet, including these securities, liquidity in the mortgage market could be affected. Lenders would have to make up the difference by raising interest rates.

The most recent real estate market data has already shown the massive impact that the rise in interest rates has had on homebuyers. “The pandemic boom in home sales is over and activity is back to pre-pandemic levels,” wrote Alex Pelle, U.S. economist at Mizuho Securities, and Steven Ricchiuto, chief U.S. economist, in a research note.

It’s clear that affordability challenges from rising interest rates and higher prices have dampened demand from homebuyers. Nevertheless, housing offers remain few and far between. That means house prices are likely to continue to rise — albeit at a slower pace — as even with a reduced pool of buyers, there isn’t enough real estate to grow around, analysts say.

And there’s a chance that rising interest rates could also dampen the supply of homes for sale. “Existing homeowners are interest-pegged when their existing mortgage rate is below the prevailing market mortgage rate because there is a financial drag to selling their homes and buying a new home at a higher mortgage rate,” Kushi said.

Most economists expect the housing market to balance out, meaning bidding wars and contingencies could soon be a thing of the past. ‘Pandemic boom in home sales is over’: Mortgage rates rise to highest since 2009 as Fed squeezes housing market

Brian Lowry

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