You have to go back to the start of the coronavirus pandemic to find mortgage rates as high as they are this week.
Freddie Mac, the federally chartered mortgage investor, aggregates rates from about 80 lenders across the country to come up with weekly national averages. The survey is based on home purchase mortgages. Rates for refinances may be different. It uses rates for high-quality borrowers with strong credit scores and large down payments. Because of the criteria, these rates are not available to every borrower.
The 15-year fixed-rate average jumped to 2.79 percent with an average 0.6 point. It was 2.62 percent a week ago and 2.21 percent a year ago. The five-year adjustable rate average rose to 2.6 percent with an average 0.3 point. It was 2.57 percent a week ago and 2.8 percent a year ago.
“Mortgage rates are rising because the Federal Reserve is expected to begin selling its vast hoard of mortgage-backed securities this year,” said Holden Lewis, a home and mortgage specialist at NerdWallet. “Investors are selling some of their mortgage-backed securities now, while there are buyers, before the Fed starts its big sell-off. Rates are going up, because investors are less eager to own debt.”
Investors have been selling Treasurys this week, driving yields to two-year highs. When investors buy a 10-year bond, they lend the government money for 10 years. The return on that investment is the yield. When yields rise sharply, it is because an investor wants to be paid more for the risk being taken for lending money long term.
Last week’s inflation data is one reason for the bond market sell-off. Consumer prices rose at their fastest pace in December in 40 years. Investors usually want to shed Treasurys when inflation is rising, because inflation erodes the value of bonds’ fixed payments.
When bond prices fall, yields rise. The yield on the 10-year Treasury jumped to 1.87 percent on Tuesday before falling back to 1.83 percent on Wednesday.
Yields are also moving higher because of the Federal Reserve. Last week when Fed Chair Jerome H. Powell testified on Capitol Hill at his confirmation hearing, he indicated the Fed would raise interest rates and wind down its bond-buying program more aggressively to deal with inflation.
“Economic indicators showed that labor markets remain tight, while consumer and producer prices continued to rise in December,” said Paul Thomas, vice president of capital markets at Zillow. “This data supports market expectations that the Federal Reserve will begin to move early in 2022 to address inflation and potentially accelerate asset purchase tapering and balance sheet runoff. … Next week, markets will be focused on the [Federal Reserve] meeting and additional data releases on GDP and inflation measures that could impact the direction of rates going forward.”
Bankrate.com, which puts out a weekly mortgage rate trend index, found that two-thirds of the experts it surveyed expect rates to rise in the coming week.
“Mortgage rates are surging now, similar to what we saw in early 2021,” said Greg McBride, chief financial analyst at Bankrate.com. “Last year, mortgage rates posted the low for the year in late January and the high for the year by mid-March. For the next 9½ months rates moved in a fairly narrow range. Don’t project the increases in the first three weeks of 2022 over the next 49 weeks. As the Fed starts to tighten, long-term rates will calm down and if inflation recedes, long-term rates might too.”
Meanwhile, higher mortgage rates aren’t deterring buyers. Propelled by a surge in purchase applications, overall mortgage applications were higher from a week ago. The market composite index — a measure of total loan application volume — increased 2.3 percent from a week earlier, according to Mortgage Bankers Association data. The purchase index jumped 8 percent. The average loan size for a purchase application set a record at $418,500. The refinance index fell 3 percent. The refinance share of mortgage activity accounted for 60.3 percent of applications.
“Home buyer demand continues to be robust this winter,” said Bob Broeksmit, president and chief executive of MBA. “The upper end of the market — where supply is less constrained — is fueling the growth in purchase activity and loan amounts. The refinance market, however, is continuing to slow. Applications were 49 percent below where they were a year ago and at their lowest level in over two years.”