Mortgage hits 14-year high as Fed hikes rates to curb inflation

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Mortgage rates have soared this week, hitting their highest level since 2008. The faster-than-expected escalation is having a chilling effect on the US housing market and putting pressure on an economy already plagued by relentless inflation.

The 30-year fixed-rate mortgage, the most popular home loan product, rose to 5.78 percent this week, up from 5.23 percent a week ago, according to data from Freddie Mac released Thursday. The rise of more than half a percentage point was the largest one-week jump since 1987. The jump came in anticipation of this week’s Federal Reserve rate hike. The Fed raised interest rates at the fastest rate since 1994 to curb rising inflation.

What does the Fed’s rate hike mean for consumers?

Consumers are faced with higher prices in almost every area of ​​their lives. Now, higher mortgage rates are limiting or pricing out their housing options. A week ago, a $300,000 loan with a 30-year fixed-rate mortgage at an interest rate of 5.23 percent would have cost a borrower about $1,653 a month, not including other costs like taxes and insurance, wrote Lending Tree- Economist Jacob Channel in an email. This week, the same loan is costing her $1,756 a month, at 5.78 percent. That’s another $103 a month, $1,236 a year, and $37,080 over the life of the loan.

The real estate boom, fueled by low interest rates, is beginning to slow down. Prices have yet to moderate, mainly supported by low inventories. According to the latest Case-Shiller Home Price Index, home prices rose 20.6 percent in March from a year earlier. But sales have slowed. Existing home sales fell in April for the third straight month, the latest available data from the National Association of Realtors. Census Bureau data released Thursday showed housing starts fell 14.4 percent from April and 3.5 percent year-on-year.

What the Fed’s rate hike means for mortgages

Higher interest rates have not only led to a drop in new and existing home sales, but also curbed the appetite for mortgages. The volume has fallen by more than 50 percent compared to the previous year. The refinancing percentage of mortgage applications is the second lowest since December 2000.

As a result, real estate and mortgage brokers are shedding jobs. Compass has cut 10 percent of its non-broker workforce and Redfin announced it will lay off about 470 employees. PennyMac Financial Services, a non-bank mortgage lender, is reducing its workforce by 207 after cutting 230 employees in March.

The slowdown in housing construction is due to the Federal Reserve raising interest rates by 0.75 percentage point. The rate hike is the third this year by the Fed. At its May meeting, the central bank raised the federal funds rate by half a percentage point. It took its first steps to bring inflation down in March, when it raised interest rates for the first time since 2018.

Federal Reserve Chairman Jerome H. Powell announced on June 15 that the Fed would raise interest rates by three-quarters of a percentage point. (Video: The Washington Post)

Although the Fed doesn’t set mortgage rates, its actions affect it. The central bank launched this initiative to curb the highest inflation in 40 years and make a whole range of borrowing more expensive than mortgages in order to reduce demand for goods and services.

The Fed is raising interest rates by the largest amount since 1994 to fight inflation

“The annual inflation rate unexpectedly accelerated to 8.6 percent in May, and mortgage rates won’t have much reason to fall as long as inflation remains high,” said Holden Lewis, home and mortgage specialist at NerdWallet. “The Federal Reserve raised short-term interest rates…to slow economic growth and contain inflation.”

Mortgage rates “continued to rise this week in response to last week’s inflation data and in anticipation of this week’s increase in the target overnight rate,” said Hannah Jones, economic data analyst at “Although interest rates tracked by Freddie Mac remain in the fives, other mortgage surveys earlier this week showed interest rates in excess of 6 percent.”

Investors had largely anticipated the aggressive move, which is why long-term bond yields trended higher this week. The 10-year Treasury yield climbed to its highest level in more than a decade, hitting 3.49 percent on Tuesday, before falling to 3.33 percent following the Fed’s announcement. At the beginning of the year, the return was 1.63 percent.

“The 30-year mortgage rate is tending to follow the 10-year Treasury yield, and the 10-year Treasury just posted its highest yield in 11 years,” wrote Steve Reich, chief operations officer at Finance of America Mortgage, in an e- Mail. “10-year government bonds are rising as investors anticipate rate hikes in the future. As a result, we’ve also seen mortgage rates trail and rise recently. In the short term, mortgage rates are likely to continue to follow a similar range and keep pace with the 10-year Treasury yield.”

Lewis expects mortgage rates to be less volatile in the near future.

“Mortgage rates tend to rise and fall in anticipation of Fed rate moves, which is a way of saying the Fed hike is already burned into mortgage rates,” he said. “In other words, mortgage rates are more likely to rise or fall before Fed meetings than after Fed meetings. For the next week or two, we probably won’t see big moves in mortgage rates like we did last week.”

The Fed signaled another 0.75 percentage point hike could also be on the table next month, although Federal Reserve Chair Jerome H. Powell told reporters at a press conference after the meeting this week that he doesn’t expect it that movements of this magnitude are common.

“With CPI inflation soaring to a 40-year high last week, it’s very likely that the Fed will take a more hawkish stance on inflation and hike rates faster than originally expected,” Reich wrote. “While there’s always a chance that rates will cool later in the year depending on where Fed inflation is forecast, we can likely expect mortgage rates to continue rising over the next few months.”

Low interest rates fueled the US housing market recovery after the Great Recession and helped push home prices to record highs. But after the pandemic sent interest rates to historic lows, rates are on the up. The 30-year fixed average, which started the year at 3.22 percent, hit 4 percent in March and 5 percent five weeks later. Although economists had expected interest rates to rise, they have escalated much faster than they predicted.

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