Mortgage Rates Moving Closer to 5%

Yesterday, a large mortgage lender shared their rate sheet with me that showed that they were quoting 30-year mortgages at 5.00% with zero points. There are other lenders with lower rates.

Mortgage News Daily reports that the most prevalent 30-year fixed rate is now at 4.66% for top tier scenarios. Matthew Graham at Mortgage News Daily wrote yesterday: Bond Market Betrayal as Mortgage Rates Hit Another Long Term High

The event in question was a speech (and subsequent comments) from Fed Chair Powell. Rather than do anything at all to push back against last week's Fed-driven rate spike, Powell forcefully doubled down on the Fed's urgent need to shift Fed policy to an even less rate-friendly stance.

Mortgage lenders were already roughly an eighth of a point higher in terms of 30yr fixed rates this morning. After Powell, rates nearly doubled that move (i.e. some lenders are a quarter of a point higher in rate versus Friday's latest levels). That makes today one of only 5 days with this big of a spike in more than a decade.

Lender rate offerings are widely stratified and many are still getting caught up with the market volatility, but it's safe to say the average lender is now over 4.5%, and much closer to 4.625% for top tier conventional 30yr fixed scenarios.

With regard to Fed Chair Powell’s speech yesterday, Goldman Sachs economists put out a research note suggesting more aggressive action from the Fed: Moving “Expeditiously” Implies a Faster Pace; Forecasting 50bp Hikes in May and June

In a speech [yesterday], Chair Powell said, “There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability.” He repeated the call “to move expeditiously” at the end of the speech. Our best guess is that the shift in wording from “steadily” in January to “expeditiously” today is a signal that a 50bp rate hike is coming. …

We now forecast 50bp hikes at both the May and June meetings, followed by 25bp hikes at the four remaining meetings in the back half of 2022 and three quarterly hikes in 2023Q1-Q3. We have left our forecast of the terminal rate unchanged at 3-3.25%. We continue to expect the FOMC to announce the start of balance sheet reduction at the May meeting

With the ten-year yield at 2.38%, and based on an historical relationship, 30-year rates should currently be around 4.3%. So, mortgage rates are higher than expected based on the ten-year yield. However, based on Goldman’s forecast for the Fed Funds rate, it seems likely investors in mortgage backed securities are factoring in future increases in interest rates.

The graph shows the relationship between the monthly 10-year Treasury Yield and 30-year mortgage rates from the Freddie Mac survey.

Freddie Mac has a similar graph here with a linear fit (using data since 1990).   Using their formula, 30-year rates would also be around 4.2%.

Of course, rates are still historically low. But rates are up sharply from the recent lows, and my view is the change in rates is what will impact housing (see my post last week: Housing, the Fed, Interest Rates and Inflation; Housing is a key transmission mechanism for the FOMC). Here is a long-term graph of 30-year mortgage rates (Freddie Mac PMMS, February is today’s rate).

Higher rates will impact affordability. Based on today’s mortgage rates, affordability has declined to levels not seen since the housing bust (I’ll have more on this after the Case-Shiller index is released next week).

Higher rates will impact the housing market, and we should expect less demand (including less investor buying), slower house price growth, and more inventory. I’ll have more soon on the likely impact on the housing market.