Mortgage rates in the United States have reached a 10-week high due to higher-than-expected inflation. This surge in mortgage rates is challenging the belief that the economy is on a steady disinflationary path. According to Freddie Mac, the 30-year fixed-rate mortgage rose to 6.77 percent from 6.64 percent last week, while the average rate for 15-year fixed-rate mortgages increased to 6.12 percent from 5.90 percent.
The increase in mortgage rates can be attributed to the spike in the 10-year Treasury yield, which rose by around 15 basis points to 4.32 percent after January’s consumer price inflation data came in higher than anticipated. The rise in borrowing costs for homebuyers can potentially slow down demand and dissuade homeowners with low rates from selling their homes. This combination of factors has contributed to a slump in the U.S. housing market for the past two years.
The impact of rising mortgage rates is evident in the decline in mortgage applications to purchase homes, which are down in more than half of all states compared to the previous year. In 2023, sales of previously owned homes fell to nearly a 30-year low, dropping almost 19 percent from the previous year. Redfin reports that pending home sales in January experienced an 8 percent decline, marking the largest decrease in four months.
The Federal Reserve has been increasing interest rates in response to soaring inflation. Since March 2022, the central bank has raised the benchmark overnight federal funds rate to its current range of 5.25-5.50 percent. While Fed officials anticipate inflation to gradually decrease towards their target of 2 percent, they warn that the battle against price pressures is far from over. As a result, interest rates may need to remain higher for a longer period.
Freddie Mac’s chief economist, Sam Khater, suggests that economic indicators indicate the Fed is unlikely to cut rates soon. This could potentially slow down the spring homebuying season as rates may stay elevated. Inflation has been a key focus, with the core Personal Consumption Expenditures measure reaching a peak of 5.5 percent in March 2022. However, it fell to 2.9 percent in December, below 3 percent for the first time since March 2021.
The Consumer Price Index, which influences cost of living adjustments to benefits like Social Security, reached a recent peak of 9 percent in June 2022. In January, it fell to 3.1 percent, slightly lower than the 3.4 percent recorded in December but higher than market expectations of 2.9 percent.
The unexpected rise in inflation has caused concern among analysts. Lawrence McDonald, former head of macro strategy at Société Générale, compared inflation to losing weight, stating that the first 10 pounds come off easily, but the last 10 require significant effort. The core month-over-month pace of inflation exceeded expectations, causing uncertainty about potential rate cuts.
Wholesale inflation data released on Friday further fueled inflation fears, as the Producer Price Index (PPI) rose 0.3 percent month over month in January, surpassing expectations of a 0.1 percent increase. This marked the biggest upward movement since last summer and raised concerns about resurgent inflation.
While some economists are wary of the potential for significant inflationary waves, Treasury Secretary Janet Yellen believes that inflation will return to normal levels where it is not a major concern for most people.
In conclusion, higher-than-expected inflation has led to a significant increase in mortgage rates, impacting the U.S. housing market. Rising borrowing costs have slowed down demand and discouraged homeowners from selling their properties. The Federal Reserve’s efforts to combat inflation by raising interest rates may prolong the period of elevated rates. While there are concerns about the potential for further inflationary waves, Treasury Secretary Yellen remains optimistic that inflation will return to normal levels.
