Mortgage rates hit 14-year highs after bond market sell-off

Mortgage rates soared to their highest levels since 2008 this week as the 30-year fixed rate – the most popular home loan product – continued its dramatic ascent, rising three percentage points in one year.

According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average shot up to 5.89% with an average 0.7 points. (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 5.66% a week prior and 2.88% a year ago.

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 climbed to 5.16% with an average 0.8 points. It was 4.98% the previous week and 2.19% a year ago. The five-year adjustable rate average jumped to 4.64% with an average 0.4 points. It was 4.51% the prior week and 2.42% a year ago.

“Mortgage rates rose as it became clear that the (Federal Reserve) will continue to fight inflation with aggressive rate hikes,” Holden Lewis, a home and mortgage expert at NerdWallet, wrote in an email. “Mortgage rates go up when inflation is high, and the August employment report highlighted an inflationary trend: average hourly earnings were up 5.2% in one year. The Federal Reserve will keep raising interest rates until wage growth slows down.”

The yield on the 10-year Treasury rose to its highest level since mid-June this week, closing at 3.33% on Tuesday. It slipped to 3.27% on Wednesday. Yields move inversely to price. When demand for bonds falls, prices decrease and yields increase. Because mortgage rates tend to follow the same path as long-term bond yields, they also moved higher.

“Whether it’s heavy issuance of corporate bonds, (a) stronger-than-expected (purchasing managers index) report from the Institute of Supply Management on the service sector of the economy or traders positioning themselves ahead of next week’s (consumer price index) report and the coming Fed meeting, the fact is bonds have been selling off,” said Michael Becker, branch manager of Sierra Pacific Mortgage. “The sell-off in bonds has led to higher mortgage rates over the last several weeks. In fact, we are close to the multiyear highs for mortgage rates that was reached back in June. Looking forward, we need some continued improvement in the inflation outlook for bonds to rally and mortgage rates to drop.”

When investors are worried about inflation, their appetite for buying bonds diminishes because the return on their investment is less when inflation is high. Inflation erodes the value of a bond’s future payments.

Since the Federal Reserve wants to see signs of the economy slowing before it pulls back on its aggressive rate hikes and there has been little indication so far that inflation has abated much, investors are expecting the Fed will increase the federal funds rate by another 75 basis points at its meeting in two weeks. (A basis point is 0.01 percentage points.) The central bank has raised its benchmark rate four times this year, most recently in July when it went up 75 basis points.

Other central banks are acting similarly to rein in inflation. The Bank of Canada hiked its interest rate by 75 basis points this week. The European Central Bank raised interest rates by 75 basis points Thursday, only the second time it has increased rates in more than a decade.

“It’s likely that (mortgage rates) will continue to trend upward in anticipation that the Fed will again raise the federal funds rate later this month,” said Lisa Sturtevant, chief economist at Bright MLS. “Some of the anticipated rate hikes are already baked into mortgage rates but it is likely that there will be some more upward movement in advance of the Fed’s meeting later this month. Mortgage rates could potentially remain as high as 6 percent through the fall, which will continue to cool buyer demand.”Bankrate.com, which puts out a weekly mortgage rate trend index, found nearly two-thirds of the experts it surveyed expect rates will go up in the coming week.

“The markets are still whipsawing on the heels of … hawkish comments from Fed Chair (Jerome H.) Powell,” said Elizabeth Rose, sales manager at Mortgage300. “As promised by Powell, it has been painful. Mortgage bonds have tanked and searching for a bottom. (This) week’s (consumer price index) numbers may give bonds some help, but until then it’s hard to see mortgage rates improving.”

Meanwhile, higher rates continued to soften mortgage demand, which is at its lowest level in more than two decades. The market composite index – a measure of total loan application volume – decreased 0.8 percent last week from a week earlier, according to Mortgage Bankers Association data.

The refinance index slipped 1 percent and was 83 percent lower than a year ago. The purchase index also slid 1 percent. The refinance share of mortgage activity accounted for 30.7 percent of applications.

“Refinance applications decreased for the fourth consecutive week,” Doug Duncan, chief economist at Fannie Mae, wrote in an email. “Since the beginning of August, with mortgage rates moving up, refinance application dollar volume has declined by 18 percent, reaching its lowest level since January 2019. Excluding holiday-impacted weeks, the (Fannie Mae refinance application level index) is now lower than the lowest levels of the refi slowdown in the fourth quarter of 2018.”