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Mortgage rates are brought down by recession fears

The 30-year fixed average tumbled to 5.3 percent, its lowest level in three weeks

Mortgage demand continues to plummet, falling for the fourth week in a row. It is at its lowest level since February 2000. (Lila Ash for The Washington Post/For The Washington Post)
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Mortgage rates took a step back this week as concerns about a recession outweighed worries about inflation.

According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average fell to 5.3 percent with an average 0.8 point. (A point is a fee paid to a lender equal to 1 percent of the loan amount. It is in addition to the interest rate.) It was 5.54 percent a week ago and 2.8 percent a year ago.

Freddie Mac, the federally chartered mortgage investor, aggregates rates from around 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 dropped to 4.58 percent with an average 0.8 point. It was 4.75 percent a week ago and 2.1 percent a year ago. The five-year adjustable rate average slipped to 4.29 percent with an average 0.3 point. It was 4.31 percent a week ago and 2.45 percent a year ago.

“The economy is starting to show signs of weakness,” said Melissa Cohn, regional vice president of William Raveis Mortgage. “While no one wants a weaker economy, lower rates are just what the real estate market needs in the middle of summer.”

The Federal Reserve raised its benchmark rate by another three-quarters of a percentage point this week, marking the fourth increase this year. It started with a 25-basis point hike in March, followed by 50 basis points in May and now back-to-back 75 basis points. (A basis point is 0.01 percentage point.) Although the news came too late to be factored into Freddie Mac’s survey, investors had been anticipating the move.

Fed hikes rates by three-quarters of a percentage point to fight inflation

“The Fed raising rates has been a bit like yelling into a cave and listening to your voice echo,” said Kate Wood, a home expert at NerdWallet. “The first time the funds rate went up, back in March, the effect on mortgage rates was loud and clear. In May, it was fainter, and in June, following a brief spike, rates rebounded so quickly it was as if there’d been no sound at all. But with the current level of economic uncertainty both globally and in the U.S., we can’t take interest rate stability for granted.”

The Fed has been raising the federal funds rate to lower inflation, which has been hovering at 40-year highs. Prices rose 9.1 percent in June, compared with prices the year before. But the hikes have caused mortgage rates to skyrocket. Although the Fed doesn’t set mortgage rates, its actions often influence them. From January to June this year, the 30-year fixed mortgage rate average rose more than 2.5 percentage points, going from 3.22 percent in January to 5.81 percent in June.

Calculate how much more mortgages will cost as interest rates rise

Although economists expect mortgage rates to continue trending higher, they are unlikely to rise as rapidly as they did the first six months of the year. Concerns about an impending recession are having a dampening effect on rates.

“Mortgage rates have dropped about half a percentage point in recent weeks, heading closer to 5.5 percent than the 6 percent rates we saw in June,” said Mike Fratantoni, chief economist at Mortgage Bankers Association. “There is a tug-of-war in market expectations, between the persistently high inflation numbers and resulting rapid Fed hikes, and the increasing risk of a sharp slowdown and possible recession. As a result, mortgage rates may have already peaked and could stay between 5 percent and 5.5 percent through the remainder of 2022.”

When investors are worried about inflation, they lose interest in buying bonds because the return on their investment is less when inflation is high. Inflation erodes the value of a bond’s future payments. Less demand causes bond prices to drop and yields to rise. Since mortgage rates tend to follow the same path as the 10-year Treasury yield, they also go up.

But in a recession, bonds are seen as a safe investment. More demand for bonds causes prices to rise and yields to fall, which usually sends mortgage rates down. After peaking at 3.09 percent earlier this month, the yield on the 10-year Treasury closed at 2.78 percent on Wednesday.

The Bureau of Economic Analysis released the latest GDP reading on Thursday, showing the economy shrank for the second quarter in a row. The report prompted concerns about an impending recession.

U.S. economy shrinks again in second quarter, reviving recession fears

Bankrate.com, which puts out a weekly mortgage rate trend index, found the experts split on where rates are headed in the coming week. Half said rates will go up, the other half said they will go down.

“If one subscribes to ‘Buy on rumor, sell on news’ [theorem], then recession and a Fed hike will become news, and we will see selling of Treasury and [mortgage-backed security] debt, which will drive rates up a bit,” said Dick Lepre, loan agent at CrossCountry Mortgage.

However, Ken H. Johnson, real estate economist at Florida Atlantic University, predicts they will fall.

“Looks like we are in for a settling of mortgage rates for a while,” Johnson said. “It seems that for now, more folks are afraid of a recession and are running for cover in 10-year T-notes versus the Fed trimming its balance sheet by selling their stock of 10-year T-notes. Until this trend settles, rates will slowly decline.”

Meanwhile, mortgage demand continues to plummet, falling for the fourth week in a row. It is at its lowest level since February 2000. The market composite index — a measure of total loan application volume — decreased 1.8 percent from a week earlier, according to Mortgage Bankers Association data.

The refinance index dropped 4 percent from the previous week and was 83 percent lower than a year ago. The purchase index was down 1 percent. The refinance share of mortgage activity accounted for 30.7 percent of applications.

“The summer slowdown in mortgage applications continued,” Bob Broeksmit, MBA’s president and chief executive, wrote in an email. “Higher mortgage rates and weakening consumer confidence are impacting homebuyer demand, especially at the lower end of the market. The typical new FHA borrower’s mortgage payment in June was $452 higher than a year ago. Despite the recent decline in activity, MBA still anticipates purchase origination volume to close the year slightly ahead of last year’s total.”

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