Mortgage rates have risen nearly a full percentage point from a year ago, bringing the rate for a 30-year fixed mortgage to its highest level since April of 2020. That means mortgage rates are becoming a deterrent for people looking to refinance, and some first-time home buyers may get priced out of the market.
The rate spike is the result of several factors. One is tighter monetary policy from the Federal Reserve. As the Fed pulls back its support for the mortgage-backed securities market, financial markets are responding. And that’s sending bond yields up. Another is the yield on the 10-year U.S. Treasury. Mortgage rates tend to track the latter. But they also respond to demand for mortgage-backed bonds.
Rising Mortgage Rates Bring Higher Monthly Payments
Mortgage rates would actually be even higher than they are now if not for the fact that some lenders are compressing their margins to compete in an environment of rising rates, Mortgage News Daily COO Matthew Graham told CNBC.
“Some will be at 3.625 percent, but many are already up to 3.75 percent,” he added.
Meanwhile, refinancing business is slowing rapidly compared to this time last year. A weekly survey from the Mortgage Bankers Association showed that applications to refinance have dropped 50 percent over a year ago.
The low mortgage rates in 2020 led to an uptick in homebuyer demand, which drove up prices on the limited stock of homes for sale. With home prices now at record highs, supply is still not keeping pace with demand.
A median-priced home priced at around $350,000 now comes with monthly payments of about $125 more than the buyers would have paid a few months back.
Fed Begins Winding Down Extraordinary Support for MBS Market
The Fed has been spending roughly $120 billion a month to purchase mortgage-backed securities in a bid to keep the market from freezing up. But it announced in December that it would end that program by March of this year.
Still, when Fed Chair Jerome Powell testified before the Senate Banking Committee last week, some legislators criticized him for not winding down the Fed’s bond-buying program earlier. They suggested that the Fed’s support has contributed to soaring inflation.
“This negative-real interest rate environment continues to distort markets, risk asset bubbles and punish savers,” Sen. Pat Toomey (R-PA) said, per Fox Business. “And the Fed has dramatically expanded its balance sheet with trillions in government bonds, effectively monetizing a lot of debt.”
Senators on the other side of the aisle worried that the Fed is tightening monetary policy too quickly, and that could make it harder for workers to get jobs. Raising interest rates usually leads to higher rates on loans, which makes businesses and consumers slow their spending and cools the economy.