Washington
CNN
—
US mortgage rates jumped higher last week as uncertainty about the debt ceiling standoff sent bond yields rising.
The 30-year fixed-rate mortgage averaged 6.79% in the week ending June 1, up from 6.57% the week before, according to data from Freddie Mac released Thursday. Rates jumped higher last week for the third week in a row. A year ago, the 30-year fixed-rate was 5.09%.
Mortgage rates tend to be pegged to US Treasury yields, which had been heading higher as America grows ever closer to default. A deal to raise the debt ceiling and avoid default is moving forward after a bill to suspend the nation’s debt limit through January 2025 overwhelmingly passed in the House.
A little over a year ago mortgage rates topped 5% for the first time since 2011 and have remained over 5% for all but one week during the past year. Since then they have gone as high as 7.08%, last reached in November. Since mid-March, rates have gone up and down but have stayed under 6.5%. Until a week ago when they tipped over 6.5%.
In addition, data shows the economy is strong, resurfacing concerns about inflation remaining too high and raising the prospect of another rate hike at the Federal Reserve’s June meeting. Although the Fed doesn’t have direct control over mortgage rates, higher interest rates tend to push bond yields higher, which also can nudge mortgage rates up.
“Mortgage rates jumped this week as a buoyant economy has prompted the market to price-in the likelihood of another Federal Reserve rate hike,” said Sam Khater, Freddie Mac’s chief economist. “Although there has been a steady flow of purchase demand around rates in the low to mid six percent range, that demand is likely to weaken as rates approach seven percent.”
A strong economy and debt ceiling standoff push rates up
The rate for a 30-year mortgage climbed this week as the debt ceiling standoff remained uncertain for much of this week.
“The fear of debt default affects mortgage rates through government-backed bonds,” said Jiayi Xu, and economist at Realtor.com. “If the U.S. defaults on its debt, bond investments become riskier, resulting in increased yields and potentially higher mortgage rates. With a debt deal pending, the likelihood of default remains very low.”
Once the deal is signed by President Joe Biden, the U.S. government is expected to quickly increase issuance of Treasury bills, said Xu. This, “has the potential to cause short-term liquidity challenges at banks, as businesses and households may reallocate their funds towards higher-yielding and relatively safer government debt.”
“In order to keep attracting depositors, banks might be compelled to raise interest rates, thereby squeezing profit margins,” she said. “This could lead to further rate increases across various loan products offered by banks, including both business loans and personal loans.”
However, the debt ceiling standoff isn’t the only thing troubling the markets or the economy.
Economic data this week highlight continued strength in the economy, said George Ratiu, chief economist at Keeping Current Matters.
The number of job openings rose in April to 10.1 million, exceeding market expectations and 3.8 million employees left their jobs during the month, with many finding better opportunities.
“Markets are keeping a close eye on Friday’s payroll employment report, looking for additional cues about the labor landscape,” Ratiu said. “The data are expected to inform the Federal Reserve’s rate decision at the June meeting.”
A cooler spring home selling season this year
Fewer homes to buy and higher interest rates are making for a cooler spring market than typical.
Mortgage applications declined for the third straight week, as higher rates, ongoing economic uncertainty, and declining affordability continue to dampen borrower demand, according to the Mortgage Bankers Association.
“The lack of homes for sale remains a headwind for the housing market this year, leading to elevated home prices and households deciding to delay buying a home,” said Bob Broeksmit, MBA president and CEO.
But if mortgage rates remain elevated, sellers looking to wrap up a move during the summer months may be motivated to cut prices.
“We may see a potential decrease in asking prices during the upcoming summer season,” said Xu.
While a decline in home prices would be welcome to first time home buyers who lack existing equity to leverage, said Xu, it could potentially erode some of the equity of current homeowners and pose risks to the financial system.
“However, thanks to today’s near-record high home equity levels, even in the event of a substantial 10% decline in home values from their level at the end of the fourth quarter, whether occurring suddenly or over two years with a climbing mortgage debt – this is an incredibly unlikely scenario,” Xu said. “Home equity as a share of total real estate value would still exceed 60%, offering a significant cushion for existing homeowners in aggregate.”
Source: cnn.com