Mortgage Rates Move Up Again, to 6.5%: Freddie Mac

The upward swing in mortgage rates continued this week in what may be an ongoing trend for the next few weeks. Rates moved higher for the third week in a row, sidelining even more potential buyers from the housing market.

The 30-year fixed-rate loan jumped to 6.5% for the week ending February 23, according to Freddie Mac. That rate is now more than 0.40 percentage points higher than it was just three weeks ago, and is almost double the average rate if a year ago. According to industry experts, mortgage rates will remain volatile over the next few weeks at least, and could edge up further — although a rate as high as 7% is considered unlikely.

The rate on a 15-year fixed-rate mortgage has also been steadily rising over the past few weeks. It reached 5.76% this week — up by 0.25 percentage points over the past seven days.

One expert says robust economic conditions are to blame for the higher rates. “The economy continues to strengthen, and interest rates are repricing to account for the stronger-than-expected growth, tight labor market and the threat of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist, in a press release.

Higher mortgage rates, says Khater, tend to create a wider gap between the pricing of lenders with the lowest and highest rates. Shopping around for various rate and loan options could deliver a savings of between $600 and $1,200 per year, estimates Khater

While higher rates are once again putting a strain on many potential homebuyers, a federal fee change this week delivered some good news, especially for first-time homebuyers.

On Wednesday, the Biden-Harris Administration, in conjunction with the Department of Housing and Urban Development, announced a 0.30 percentage point reduction in the annual mortgage insurance premium (MIP) charged on loans guaranteed by the Federal Housing Administration.

Such loans are issued to those (including many first-time buyers) who may not qualify for a conventional loan. A monthly insurance fee that’s paid in addition to the monthly mortgage payment, the MIP is required for all FHA-backed loans and is designed to protect the lender in case a borrower has difficulty repaying the loan.

The move will reduce the MIP from 0.85 to 0.55% of the loan amount for a majority of new FHA borrowers. The cut is expected to reduce the borrowing costs for an estimated 850,000 homebuyers and owners this year, producing an average annual savings of $800, with some potentially saving up to $1,500.

Rising mortgage rates puncture some optimism

There’s more uncertainty today over the economic outlook compared with the latter part of 2022, when inflation seemed to be heading downward. The reversal has produced an upward swing in mortgage rates that is tamping down on the housing market.

As inflation steadily declined during the fourth quarter of 2022, there was growing optimism that a severe economic downturn could be avoided. Market analysts were hopeful that the Federal Reserve would be able to ease back or even reverse its current policy of increasing the federal funds rate.

That optimism has faded over the past week, and not just because of the immediate rate hikes. The strong employment and retail sales reports from January, coupled with a higher-than-expected inflation report, have further raised fears that the Fed will now have to continue raising rates for a longer period of time.

“The sluggish cooling of demand adds to worries that inflation may not be decelerating fast enough to prevent a more aggressive policy stance,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans, in a statement.

As a result, adds Divounguy, higher mortgage rates are “eroding much of the progress made on the housing affordability front over the past few months.”

How the current run-up in rates will affect the spring buying season remains to be seen, as markets await further economic indicators that will influence any changes in the Fed’s rate policy going forward.

The fed fund is the interest rate banks charge each other for short-term loans. By increasing this rate, the Fed increases the cost of borrowing for all sorts of credit, including mortgage rates. By making it more expensive to borrow money, demand for goods and services should slow and consumer prices will start to fall. Eventually, inflation should be brought back down to the central bank’s target range of 2%.

Inflation is currently at 6.4%, well above the Fed’s target range but better than the peak of 9.1% reported last June.

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