Mortgage rates are suddenly rising again. Why?
Mortgage rates are back up to almost 7% in a reversal of some of the declines in recent months, pointing to growing concerns about future inflation.
The 30-year-fixed rate jumped to 6.90% last week, up from 6.86% a week earlier and its highest level since July, according to data from the Mortgage Bankers Association released Wednesday. Despite the increase, overall mortgage loan application volume ticked up by 1.7% on a weekly basis.
What’s driving this rise in mortgage rates? Andrew Krei, co-chief investment officer for Crescent Grove Advisors, said to look at the increase in 10-year Treasury yields since the Federal Reserve began slashing interest rates. Prior to the Fed’s first, 50-basis-point rate cut in September, the 10-year yield was hovering around 3.6%. As of Tuesday, the yield had popped back up to about 4.4%.
“You’ve seen mortgage rates go up kind of in lockstep alongside that,” Krei said. “The bond market is telling you there’s risks out there around growth and inflation: Upside risks in the case of growth would be a good thing, but inflation perhaps a less good thing, and that then filters into the mortgage market.”
Mortgage-backed securities and 10-year Treasury yields tend to move together because they often draw the same investors.
The Federal Open Market Committee has lowered interest rates by 75 basis points over the last three months — a move many thought would help lower mortgage rates. The federal funds rate currently sits at 4.50%-4.75%, with Wall Street pricing in one more cut this year and several more reductions through 2025.
In anticipation of the cuts, mortgage rates fell to a two-year low in September, according to a report from real estate site Zillow (Z) released Tuesday. That month, a middle-income household could afford 27.3% of homes for sale — the highest level of affordability since February 2023.
But the sharp reversal in mortgage rates in recent weeks likely put a damper on any affordability gains, Zillow said.
In an October research note, Goldman Sachs (GS) analysts said they believed the decline in mortgage rates had “largely run its course,” with rates closer to 6%. The investment bank lowered its year-end 2024 and 2025 30-year conforming mortgage rate forecasts to 6.0% and 6.05%, respectively, from a prior forecast of 6.5% and 6.1%. Rates are widely expected to fall below 6% next year, although recent trends cast doubt on both year-end and 2025 projections.
Housing affordability has remained one of the biggest challenges facing prospective homebuyers across the country. Home prices grew 5.9% in October from a year earlier — the smallest annual increase since December, Redfin (RDFN) data, published Tuesday, showed. On a monthly basis, home prices rose 0.5% month over month, the same pace as September and the 12th consecutive month with price growth between 0.2% and 0.7%.
Shelter prices remain among the stickiest areas of the economy when it comes to inflation. The consumer price index climbed 2.6% in the 12 months ended October. More than half of the increase was driven by shelter costs, which rose 0.4%.
A lack of housing supply has also pushed up prices. In October, there were just shy of 1.8 million homes for sale, up 12.6% year over year, according to Redfin. Despite the annual increase, supply remains well short of demand nationwide. That could keep prices high, Krei said.
“Over the next 18 to 24 months, thing are going to be pretty soft from a supply perspective,” he said. “That’s partly a function of interest rates. It’s partly a function of just broader capital markets. All told, that probably points to a sticky level of inflation for housing.”