Fixed mortgage rates hit 20-month high as long-term bond yields rise

What a difference a year makes. One year ago this week, the 30-year fixed mortgage rate sank to its lowest level in history. This week, fixed mortgage rates followed long-term bond yields and rose to their highest levels in 20 months.

According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average climbed to 3.22% with an average 0.7 point. (A point is a fee paid to a lender equal to 1% of the loan amount. It is in addition to the interest rate.) It was 3.11% a week ago and a record-low 2.65% a year ago. This is the highest the 30-year fixed average has been since May 2020.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 rose to 2.43% with an average 0.6 point. It was 2.33% a week ago and 2.16% a year ago. The five-year adjustable rate average held steady at 2.41% with an average 0.5 point. It was 2.75% a year ago.

"With little economic data during a slow holiday week, markets seem to be pricing in continued economic recovery, despite covid cases spiking due to the omicron variant," said Paul Thomas, Zillow's vice president of capital markets. "Most indicators continue to point to inflationary pressures, with tight labor markets and challenges in addressing supply chain issues. Market participants appear to be optimistic that the new covid case surge will not be as impactful to economic activity as prior waves, but still wary that potential shutdowns could slow economic growth."

When the Federal Reserve released the minutes from its December meeting this week, it sent ripples through the financial markets. Stocks fell after the Fed signaled that it might be more assertive with pulling back on bond purchases, hiking interest rates and selling off its balance sheet in the next several months. According to the minutes, officials said high inflation and a tight labor market could prompt them to raise the benchmark rate "sooner or at a faster pace than participants had earlier anticipated." Although the Fed doesn't set mortgage rates, its decisions can influence them.Central bank officials also approved a plan to end their monthly purchases of Treasurys and mortgage-backed securities by March rather than June. Since the beginning of the pandemic, the Fed has been buying assets to prop up the economy. Until November, when it began tapering those purchases, it was purchasing $120 billion each month.

The minutes went on to say that some officials are in favor of shrinking its balance sheet of $8.76 trillion in bonds and mortgage-backed securities not long after it begins raising rates. While these measures could tamp down inflation, they are likely to cause mortgage rates to move higher."With economic momentum gaining, the Federal Reserve's recently released minutes point to a faster pace of balance sheet reduction in the months ahead," said George Ratiu, manager of economic research at Realtor.com. "This also indicates that rising mortgage rates are on the horizon."A bond market sell-off pushed long-term yields to their highest level in nine months. The yield on the 10-year Treasury closed at 1.71% on Wednesday, after closing out the year at 1.52%. Mortgage rates tend to follow the same path as long-term bonds, although that has been less the case recently.

"New Year's optimism has money flowing away from bonds and toward riskier assets, pushing yields and mortgage rates higher to start 2022," said Greg McBride, chief financial analyst at Bankrate.com.Bankrate.com, which puts out a weekly mortgage rate trend index, found nearly two-thirds of the experts it surveyed expect rates to go up in the coming week.

"As long anticipated, 10-year Treasury notes are moving up," said Ken H. Johnson, real estate economist at Florida Atlantic University. "This will lead to a rise in mortgage rates eventually. What can slow down this rise in rates? More covid uncertainty or another large stimulus package injected into the economy could both serve to increase the demand and lower yields for 10-year Treasury notes. However, this seems unlikely at this point."

Meanwhile, mortgage applications declined from two weeks ago. Because of the holidays, the Mortgage Bankers Association did not release its data last week. The market composite index - a measure of total loan application volume - decreased 2.7% from two weeks earlier, according to MBA's data. The purchase index was down 4%, and the refinance index fell 2%. The refinance share of mortgage activity accounted for 65.4% of applications.

"2021 was a banner year for the housing market," said Bob Broeksmit, president and chief executive of MBA. "Although applications to buy a home slowed in the final two weeks of December, strong housing demand and rising home sales and prices throughout the year pushed total purchase loan volume to a forecasted record of $1.61 trillion. The refinance market started the year strongly before tapering off in late spring, and MBA anticipates refinance volume will total $2.32 trillion, which is a decline from 2020 but still the third-highest annual total ever."

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