Freddie Mac, the federally chartered mortgage investor, aggregates rates from about 80 lenders across the country to arrive at weekly national averages. The survey is based on mortgages on the purchase of a home. Refinance rates may be different. It uses rates for high quality borrowers with strong credit scores and large down payments. Due to criteria, these rates are not available to all borrowers.
The average of fixed rates over 15 years fell to 4.58% with an average of 0.8 points. It was 4.75% a week ago and 2.1% a year ago. The average of the adjustable rates over five years slipped to 4.29% with an average of 0.3 points. It was 4.31% a week ago and 2.45% a year ago.
“The economy is starting to show signs of weakness,” said Melissa Cohn, regional vice president of William Raveis Mortgage. “While no one wants a weaker economy, lower rates are exactly what the housing market needs in the middle of summer.”
The Federal Reserve raised its benchmark rate another three-quarters of a percentage point this week, marking the fourth increase this year. It started with a 25 basis point hike in March, followed by 50 basis points in May and now a straight 75 basis points. (One basis point equals 0.01 percentage points.) Although the news came too late to factor into the Freddie Mac survey, investors had anticipated the move.
Fed hikes rates by three-quarters of a percentage point to fight inflation
“The Fed’s rate hike has been a bit like shouting into a cave and listening to your voice echo,” said Kate Wood, in-house expert at NerdWallet. “The first time the funds rate rose, in March, the effect on mortgage rates was loud and clear. In May it was weaker and in June, after a brief spike, rates rebounded so quickly it was as if there had been no sound. But with the current level of economic uncertainty both globally and in the United States, we cannot take interest rate stability for granted.
The Fed raised the federal funds rate to reduce inflation, which has hovered at 40-year highs. Prices rose 9.1% in June, compared to prices a year earlier. But the increases sent mortgage rates skyrocketing. Although the Fed does not set mortgage rates, its actions often influence them. From January to June of this year, the average 30-year fixed mortgage rate increased by more than 2.5 percentage points, from 3.22% in January to 5.81% in June.
Calculate the cost of additional mortgages as interest rates rise
Although economists expect mortgage rates to continue their upward trend, they are unlikely to rise as quickly as they did in the first six months of the year. Fears of an impending recession are having a moderating effect on rates.
“Mortgage rates have fallen about half a percentage point in recent weeks, approaching 5.5% from the 6% rates we saw in June,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. “There is a tug of war in market expectations, between persistently high inflation figures and the resulting rapid Fed hikes, and the growing risk of a sharp downturn and possible recession. As a result, mortgage rates may have already peaked and could stay between 5% and 5.5% through the end of 2022.”
When investors worry about inflation, they lose interest in buying bonds because the return on their investment is less when inflation is high. Inflation erodes the value of a bond’s future payments. A drop in demand causes bond prices to fall and yields to rise. Since mortgage rates tend to follow the same path as the 10-year Treasury yield, they also rise.
But in times of recession, bonds are considered a safe investment. Increased demand for bonds leads to higher prices and lower yields, which generally lowers mortgage rates. After peaking at 3.09% earlier this month, the 10-year Treasury yield closed at 2.78% on Wednesday.
The Bureau of Economic Analysis released the latest GDP reading on Thursday, showing the economy contracted for the second consecutive quarter. The report raised concerns of an impending recession.
US economy shrinks again in second quarter, reigniting recession fears
Bankrate.com, which publishes a weekly index of mortgage rate trends, found experts divided on the direction of rates in the coming week. Half say rates will go up, the other half say they will go down.
“If you subscribe to ‘Buy on Rumour, Sell on News’ [theorem]then the recession and a Fed hike will become news, and we will see the sale of Treasuries and [mortgage-backed security] debt, which will push rates up slightly,” said Dick Lepre, loan officer at CrossCountry Mortgage.
However, Ken H. Johnson, a real estate economist at Florida Atlantic University, predicts they will fall.
“It looks like we’re set to adjust mortgage rates for a while,” Johnson said. “It looks like right now more people are fearful of a recession and hiding in 10-year T-notes as the Fed shrinks its balance sheet by selling its stock of 10-year T-notes. Until this trend stabilizes, rates will slowly decline.
Meanwhile, demand for mortgages continues to fall, dropping for the fourth week in a row. It is at its lowest level since February 2000. The composite market index – a measure of the total volume of loan applications – fell 1.8% from the previous week, according to data from the Mortgage Bankers Association. .
The refinancing index fell 4% from the previous week and was 83% lower than a year ago. The purchases index fell by 1%. The refinancing share of mortgage activity represented 30.7% of applications.
“The summertime slowdown in mortgage applications continued,” MBA President and CEO Bob Broeksmit wrote in an email. “Rising mortgage rates and weakening consumer confidence are impacting demand from homebuyers, particularly at the lower end of the market. The typical mortgage payment for a new FHA borrower in June was $452 higher than a year ago. Despite the recent decline in activity, MBA still expects purchase origination volume to end the year slightly ahead of last year’s total.