Interest rates on mortgages reached 5 percent for the first time since 2011

Mortgage interest rates are rising rapidly – rising above 5 percent for the first time in more than a decade – and they are beginning to dampen the booming housing market.

The 30-year fixed-rate average, the most popular mortgage product, hit the new threshold this week, Freddie Mac reported Thursday. It has not been that high since February 2011.

Low prices fueled the revival of the US housing market after the Great Recession and have helped drive house prices to record levels. But after two years of soaring historical lows, rates have been on the fast side: In January, the 30-year fixed average was 3.22 percent. That was 3.04 percent a year ago.

Although mortgage rates were expected to rise, their rise has been faster than many economists predicted. Inspired by inflation, interest rates have risen.

Inflation, which has hit consumers hard in their daily lives, is also causing pain for home buyers. Several months ago, a home buyer would pay $ 1,347 a month on a $ 300,000 loan at 3.5 percent. If the buyer waited until this week, the same 5 percent loan would increase the monthly payment by $ 263 to $ 1,610.

The Federal Reserve’s efforts to tame inflation are driving up interest rates. Although the Fed does not set mortgage rates, it does affect them. The central bank took the first steps towards bringing inflation down earlier in March, when it raised its benchmark rate for the first time since 2018. In addition to the interest rate hike from the Federal Funds, the Fed will soon begin the process of reducing its balance sheet.

The Federal Reserve holds about $ 2.74 trillion in mortgage-backed securities. It indicated it would unveil its plans to reduce its holdings at the May meeting. The more aggressively the Fed sells these bonds, the faster mortgage rates are likely to rise.

Housing costs do not only burden buyers and sellers. It has also proved to be a major complication to the economic recovery and potentially threatens the ability of politicians to curb inflation that has seeped throughout the economy.

Inflation is rising at the fastest pace in 40 years, and prices have risen 8.5 per cent in March compared with the previous year. Housing is a large part – about a third – of the basket of goods and services used to calculate inflation, or what is known as the “consumer price index.” This means that if housing costs do not turn around meaningfully quickly, it will be much harder for overall inflation to simmer down to more normal levels.

Housing costs also differ from other categories, such as gas, food, or airline tickets, which may be more susceptible to forces such as the ongoing pandemic, supply chain disruptions, or a war.

For example, gas or energy prices are unlikely to remain as high as they were when Russia invaded Ukraine and triggered huge consequences for the world’s energy markets. Food can also become cheaper as supply chains smooth out over time.

But those forces do not apply to housing costs in the same way. Landlords who can lock in higher rents are unlikely to shave prices a year later. Buyers will continue to shout for the few homes available. And as the housing market has been overwhelmed by competitive bidding wars and offers with full cash, it is unclear how drastically demand will have to cool before housing costs will turn meaningfully.

Even Fed officials are riding the wave. This week, Fed Governor Christopher Waller said he was selling his house in St. Louis. Louis to a cash buyer without inspection.

“The national housing market is unimaginable,” Waller said at a listening session Monday held by the Fed.

It was the Fed’s actions during the pandemic that drove mortgage rates down. The 30-year fixed average reached a low of 2.65 percent in January 2021. By lowering federal funds interest rates to close to zero and buying government bonds and mortgage-backed securities to support the economy, the central bank ushered in an era of cheap mortgages.

As it became cheaper to borrow, house prices rose as buyers could afford to spend more on housing. The latest Case-Shiller housing index showed that prices rose 19.2 percent in January year-over-year. Phoenix, Tampa and Miami saw increases of 32.6 percent, 30.8 percent and 28.1 percent, respectively.

Prices should be moderated, but rising prices will continue to make affordability a challenge. And although higher rates are expected to slow home purchases over time, the factors that led to the housing boom are still back. Inventories remain low and demand remains high.

“We have already seen buyer activity slow in terms of seeing fewer home sales,” said Lisa Sturtevant, a housing market analyst in Alexandria, Va. “Part of it has to do with the fact that there is not enough to buy. I think we’ll probably be seeing a pretty strong spring as people try to get in before they think the rates will go even higher. “

With the rise in interest rates, the mortgage market boom in 2020 and 2021 has subsided this year. Applications for refinancing have fallen to the lowest level since 2019. The Danish Mortgage Credit Association predicts that the overall origin will fall by more than 35 percent this year. Purchasing production is expected to increase by 4 percent, but refinancing is expected to decrease by 64 percent.

“The jump in mortgage rates will slow the housing market and further reduce the demand for refinancing for the rest of this year,” said Mike Fratantoni, MBA’s chief economist, in a statement. “Higher house prices and prices as well as ongoing supply constraints are now expected to lead to an annual decline in sales of existing homes.”

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