Right here’s why mortgage charges hold rising — although the Fed plans to maintain rates of interest low
The Federal Reserve plans to stay on course to keep interest rates down – but that’s not exactly music to homebuyers’ ears.
On Wednesday, the Federal Reserve signaled that it would not raise interest rates until 2023 at the earliest, although some observers have raised concerns about rising inflation. Currently, seven of the 18 Fed officials expect a rate hike in 2023, while four believe a rate hike could happen next year.
Investors welcomed the news with the Dow Jones Industrial Average DJIA (+ 0.19%) and the S&P 500 SPX (-0.61%), both breaking intraday records after the Fed announced on Wednesday. It remains to be seen whether the Fed’s policies will be similarly beneficial for home buyers or for those looking to refinance their existing mortgages.
Since the beginning of the year, the reference rate for the 30-year fixed-rate mortgage has risen by more than 40 basis points, according to Freddie Mac.
On Thursday, the average 30-year fixed-rate mortgage maturity was 3.09%, four basis points more than the week before, Freddie Mac FMCC reported -0.36%. This is the highest level the reference mortgage rate has reached since last June.
Meanwhile, the average interest rates for the 15-year fixed-rate mortgage and the 5-year variable rate mortgage in the Treasury Index rose two basis points to 2.4% and 2.79%, respectively.
“The Fed’s policy rate itself has no impact on mortgage rates,” said Tendayi Kapfidze, chief economist at LendingTree TREE, -3.78%,
In explaining the Fed’s policy decision, this week’s mortgage rate hike was not stopped. The Federal Reserve controls short-term interest rates. However, mortgage rates are long-term rates, and mortgage lenders use the bond market as a guide when setting the rates they will charge borrowers.
In particular, the mortgage rates roughly correspond to the direction of the 10-year Ministry of Finance TMUBMUSD10Y (1.755%).
But even that relationship isn’t foolproof. “This relationship can vary,” said Kapfidze. “Ten-year government bond rates were up from August 2020, but mortgage rates were still falling through February.”
Mortgage rates have risen rapidly in the past few weeks, hitting their highest level since July, as investors became increasingly concerned about inflation. With Americans now receiving the stimulus checks approved under the US $ 1.9 trillion rescue plan, some analysts expect people to rush and spend that money, causing the prices of consumer goods and services to spike leads.
Still, the Fed’s stance and policies could have some impact on mortgage rates, even if the central bank doesn’t directly control them. Since the pandemic began, the Federal Reserve has stepped up its purchases of mortgage-backed securities to pump much-needed liquidity into the market. These purchases helped lower interest rates.
“Confirming his commitment to ongoing asset purchases and realizing that there is some taper on the horizon – probably quite a long way off – should help slow the rise in mortgage rates,” said Danielle Hale, chief economist at Realtor.com. Hale noted that she expects the general upward trend in mortgage rates to continue.
However, if the Fed reverses its policies on mortgage-backed securities, interest rates could rise rapidly as lenders face liquidity shortages. Alternatively, if the Fed decided to increase its purchases of 10-year Treasury bills to curb long-term interest rates, mortgage rates could fall, Kapfidze said.
In both cases, mortgage rates remain very low by historical standards, even if they are now above the 3% mark, and industry experts believe that demand for mortgages will remain strong.
The Mortgage Bankers Association “continues to see a very strong real estate market, with home-purchase mortgage applications increasing even as refinancing demand fades,” said Mike Fratantoni, chief economist for the trade organization. “While mortgage rates are likely to rise a little higher, the buying market will stay on course for a record year.”