Mortgage rates continued to climb this week as U.S. bond yields hit their highest level since 2008. Despite the turbulence, some analysts said a debt crisis is not imminent. According to those analysts, investors in the bond market are reacting to the government issuing debt and expecting the Federal Reserve to increase rates in September amid persistent inflation.
Freddie Mac‘s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 7.09% as of August 17, up from last week’s 6.96%. By contrast, the 30-year fixed-rate mortgage was at 5.13% a year ago at this time.
“The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “The last time the 30-year fixed-rate mortgage exceeded 7% was last November.”
Other indices showed even higher mortgage rates.
HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 7.18% on Wednesday, compared to 6.98% the previous week. At Mortgage News Daily on Thursday morning, the 30-year fixed rate for conventional loans was 7.34%, up 29 basis points from the previous week.
Several mortgage loan officers told HousingWire they were quoting rates between 7.2% and 7.5% on Wednesday.
Home loan rates usually follow the 10-year treasury yields due to their long terms. In early August, the U.S. Treasury announced higher-than-expected debt supply, while rating agency Fitch Ratings downgraded the credit quality of the U.S.
For some economists, it explains why the 10-year treasury yield climbed to 4.28% on Monday, 28 basis points higher than the previous Monday.
“As a country, we are issuing a lot of debt to finance our deficit. In the short-term, the bond buyers aren’t at the prices, so yields went up after a bad auction last week,” Logan Mohtashami, HousingWire’s lead analyst, said. “Also, the economy is much stronger than anyone thought, so rates are staying up longer too. Bond buyers are mindful of this.”
Mohtashami said that the U.S. economy will be in an environment where it doesn’t have a lot of bond buyers versus the supply coming in, “thus making it harder for mortgage rates to go lower.”
In a recent report, Patrick Saner, head of macro strategy at the Swiss Re Institute, discarded a looming bond crisis or issues around U.S. creditworthiness. He said factors like deficits and government bond supply did not cause the uptick in yields. The driver was a market reassessment of the nominal “neutral rate” due to inflation persistence.
“Increases in longer-dated yields are usual at the end of hiking cycles. Yet, sustained and rapid increases have only ever occurred when the Fed funds rate was at 0%, which isn’t the case right now,” Saner said in the report. “For longer-dated yields to go even higher, a reacceleration of core and wage inflation is probably needed.”
What to expect from the Fed?
On Wednesday, the Fed released the minutes from its July meeting when it increased rates by 25 bps. The document shows that officials are concerned with the cumulative effects of past monetary policy tightening on the economy. The Fed started to increase federal funds rate at the beginning of 2022.
But participants of the Fed also mentioned upside risks to inflation, including those associated with scenarios in which recent supply chain improvements and favorable commodity price trends did not continue. They also have concerns that demand and the labor market continue strong.
“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” the document states.
In fact, consumer demand is still a source of pressure on U.S. prices.
Jiayi Xu, a Realtor.com economist, said that despite still high prices and elevated interest rates, July’s retail sales data showed consumer spending continues to increase solidly as demand is being boosted by high wage growth.
“While this robust data might alleviate worries about an imminent recession, it could give rise to concerns that interest rates might stay elevated for an extended period,” Xu said in a statement. “Meanwhile, it is worth noting that the Fed is moving cautiously to ensure that the effects of earlier rate hikes are fully revealed. As a result, the Fed may opt to take another “wait-and-see” strategy in the upcoming FOMC meeting, which may help potentially mitigate the recent upward trajectory of mortgage rates.”
Regarding the labor market, George Ratiu, chief economist at Keeping Current Matters, said that while employment momentum is moderating, there is still a gap of 3.8 million between the number of open positions and unemployed people looking for work. The upside: a firmer financial foundation for households. The downside: amid solid wage gains, the Fed remains hawkish on the outlook for taming inflation this year.
“With inflation still a primary concern for the Fed, real estate markets can expect borrowing costs to stay elevated,” Ratiu said in a statement.
