Mortgage rates exceed 5% for the first time in 10 years

(The hill) – The interest rate on the 30-year fixed-rate mortgage hit a 10-year high of 5% on Thursday, continuing steep declines that began last December in a US housing market where values ​​are soaring .

The rate on America’s most popular mortgage has climbed almost 2 points from 3% a year ago, according to the latest figures from government mortgage administrator Freddie Mac. The last time the 30-year fixed rate mortgage hit 5% was in February 2011.

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

“This week, mortgage rates averaged five per cent for the first time in over a decade,” said Sam Khater, chief economist at Freddie Mac. “As Americans face historically high inflation, the combination of rising mortgage rates, high home prices and tight inventories makes the pursuit of homeownership the most expensive in a generation.”

Variable-rate mortgages also rose, with the standard 5-year Treasury-indexed mortgage averaging 3.69%, up from 2.8% last year.

Due to soaring rates, the mortgage market is seeing a drop in activity, according to information from the Mortgage Bankers Association (MBA) trade group, as would-be homeowners reconsider buying homes and investing in real estate .

An MBA Mortgage Market Index shows loan application volumes were down 1.3% from the previous week. Home refinance application volumes fell 5% on the week and 62% from a year earlier.

“The rapid rate hike, caused by a much faster pace of rate hikes and reductions in the Federal Reserve’s balance sheet, is in response to the booming labor market and inflation at its highest level since 40 years,” said Mike Fratantoni, an economist. with the MBA, said in a statement. “Spiking mortgage rates will slow the housing market and further reduce demand for refinancing the rest of this year. Rising house prices and prices along with ongoing supply constraints are now expected to drive annual sales down. of existing houses.

In addition to high interest rates, home sales are also facing high prices in the housing market due to the pandemic, as well as shortages in the supply of building materials amid larger disruptions. in the supply chain that contribute to inflation.

“High inflation continues to push mortgage rates up,” Nadia Evangelou, an economist at 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 potential buyers need to spend more of their housing budget to buy the typical home. »

Payroll data released this week by the Department of Labor saw real earnings fall 2.7% from March last year. The change in earnings combined with a 0.9% decline in the length of the average workweek resulted in a 3.6% decline in real average weekly earnings over the past year.

“Comparing inflation to real wage growth since 2008, this is the first time inflation has grown so much faster than wages,” Evangelou said. “With rising borrowing costs, expect around 16 million households to be shut out of the market this year. As a result, NAR expects home sales activity to fall by around 10% in 2022. . »

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

To fight inflation, some analysts have suggested that the Federal Reserve could raise interest rates up to six times this year, taking the federal funds rate to 1.9% by the end of the year. . The risk of such a rise is a contraction in the economy, but with inflation driving the recession itself, most analysts see the Fed as having little choice.

“The twin shocks of the war in Ukraine and the rise of high inflation in the United States and Europe will lead to a recession in the United States and a recession in growth in the euro zone over the next two years” , predicted the Deutsche Bank researchers. earlier this month.

“More troubling, particularly in the United States, are signs that the underlying drivers of inflation have widened, emanating from very tight labor market conditions and spreading from goods to services,” the statement said. society. “The forecast is for inflation to recede to more desired levels over the next few years assuming there are no further geopolitical or supply shocks and central banks take action, just in time. , to keep inflation expectations anchored.If these assumptions turn out to be incorrect, inflationary pressure, central bank tightening and economic downturns could all be more intense than the baseline projections.