Inflation and Fed action set the stage for higher mortgage rates – Orange County Register

By Alex Veiga | The Associated Press

Mortgage rates have hovered near historic lows for much of this year, even as inflation has risen sharply in much of the economy.

That could start to change in the coming weeks, now that the Federal Reserve has signaled that it may announce as early as next month its intention to start undoing measures it has taken to support the economy during the pandemic.

The Fed is expected to announce a schedule for reducing its monthly bond purchases at its next meeting in early November. These bond purchases have helped keep mortgage rates extremely low for most of the past 18 months.

The yield on the 10-year Treasury bill has risen steadily since the central bank’s last policy update in mid-September, reaching 1.64% this week. Mortgage rates, which tend to follow movements in the 10-year Treasury yield, have also increased.

The average rate on a 30-year mortgage climbed to 3.09% this week, the highest level since April, when it peaked at 3.18%, according to Freddie Mac. A year ago, the rate was on average 2.8%.

Signals from the Fed and signs that inflation remains pervasive set the stage for mortgage rates to rise further in the coming months, economists say.

“The biggest influence is that the Federal Reserve is about to start cutting its bond purchases as early as next month,” said Greg McBride, chief financial analyst at Bankrate. “However, in the months to come, inflation will likely be the main determining factor in the evolution of mortgage rates. Whether or not they go higher, and if so, how much higher. “

McBride expects long-term mortgage rates to average between 3% and 4% over the next 12 months.

That’s along the same lines as the Mortgage Bankers Association’s forecast this week, which predicts the average rate on a 30-year fixed-rate mortgage will close this year at 3.1% and then drop to 4%. by the end of next year. year.

Southern California home prices hit a record high of $ 688,500 in September, although the pace of price increases appears to be slowing, DQ News / CoreLogic reported on Wednesday, October 20. (File photo: Jebb Harris, Orange County Register)

The National Association of Realtors is also seeing rates rise from here, reaching 3.5% by mid-2022.

“The Fed will likely raise interest rates by the middle of next year,” NAR senior economist Nadia Evangelou wrote in an inflation analysis last week. “When the Fed raises its interest rates, so do the banks. And when that happens, mortgage rates go up for borrowers. “

Last December, the Fed said it would buy $ 120 billion a month in bonds until the economy made “substantial progress” towards its targets for maximum employment and 2% inflation. on average over time. Bond purchases are aimed at stimulating more borrowing and spending by keeping long-term interest rates low.

The central bank also kept its short-term policy rate near zero, but rising inflation has stepped up pressure on the Fed to reduce its low interest rate policies.

The Consumer Price Index, a key measure of inflation, climbed 5.4% in September from a year earlier, the largest increase since 2008.

Inflation has always been lower than the average rate for a 30-year mortgage. But since April, inflation has been above the average long-term mortgage rate. The last time inflation exceeded the 30-year average mortgage rate was in August 1980, according to the Federal Reserve.

With mortgage rates bottoming out – the average rate on a 30-year mortgage hit an all-time low of 2.65% in the first week of January – a rate hike shouldn’t derail the real estate market ultra-competitive American. . But that still means that future owners will have less purchasing power. It also means that homeowners who have considered refinancing may miss their chance to lock in a lower rate.

“The lowest levels may be in the rearview mirror, but mortgage rates are still lower than anything seen before the summer of 2020,” McBride said. “If you haven’t refinanced yet, do so now. We are likely to see higher rates, not lower rates, in the coming months. “

The volume of mortgage refinancing has slowed in recent months after increasing last year. Mortgage refinancing accounted for 70.7% of home loans issued in the first three months of this year, according to the MBA. The share fell to 56% in the second quarter and 55% in the third.

The MBA predicts that mortgage refinancing will drop 62% next year to $ 860 billion, from $ 2.26 trillion this year.

Even with higher mortgage rates, the housing market is expected to remain very competitive given the shortage of homes for sale relative to demand. As such, the MBA expects home purchase mortgages to increase 9% next year to a record $ 1.73 trillion.

On the bright side for homebuyers: If mortgage refinancing demand continues to slow, banks keen to make up for lost income may be more willing to lower fees in order to appeal to potential home buyers looking for a mortgage.

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