A For Sale sign is displayed in front of a house in Washington, DC, on March 14, 2022.
Here's where mortgage rates and home prices may be headed in 2023
01:41 - Source: CNN Business
Washington, DC CNN  — 

Mortgage rates shot up for the fourth consecutive week, as inflation concerns remain.

The 30-year fixed-rate mortgage averaged 6.65% in the week ending March 2, up from 6.5% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 3.76%.

Rates had been trending downward after hitting 7.08% in November, but are now climbing again, up about half a percentage point in a month. Robust economic data continues to suggest the Federal Reserve is not done in its battle to cool the US economy and will likely continue hiking its benchmark lending rate.

“As we started the year, the 30-year fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy,” said Sam Khater, Freddie Mac’s chief economist. “However, given sustained economic growth and continued inflation, mortgage rates boomeranged and are inching up toward 7%.”

The lower rates in January brought buyers back into the market, Khater said.

“Now that rates are moving up, affordability is hindered and making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates,” he said.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less than ideal credit will pay more than the average rate.

Inflation expected to stay elevated longer

The benchmark rate continued to climb, building on the momentum from the past few weeks, as the 10-year Treasury hit 4% this week.

The Fed does not set the interest rates that borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

“Investors are expecting inflation to remain elevated for longer, requiring the Federal Reserve to keep increasing its policy rate,” said George Ratiu, Realtor.com senior economist. “The Fed signaled that it sees its monetary tightening having an effect on price growth, but with a strong employment market, wages keep consumers spending.”

Meanwhile, Ratiu said, consumers have taken on a record amount of debt, including mortgage, personal, auto, and student loans.

“The personal savings rate has dropped significantly from the pandemic high, as high prices have been squeezing household budgets,” he said. “With rising interest rates, financial burdens are expected to increase, making consumer choices more difficult in the months ahead.”

Mortgage applications drop on rising rates

The brief boost in mortgage and home buying activity in January as rates dropped has ended, with mortgage applications falling last week to a 28-year low, according to the Mortgage Bankers Association.

“The recent jump in mortgage rates has led to a retreat in purchase applications, with activity down for three straight weeks,” said Bob Broeksmit, MBA’s CEO. “After solid gains in purchase activity to begin 2023, higher rates, ongoing inflationary pressures, and economic volatility are giving some prospective home buyers pause about entering the housing market.”

Rates are trending back up and could even crest 7% again in the next couple of months, said Ratiu.

“For real estate markets, the rise in rates means higher mortgage payments, deepening the affordability challenge just as we move into the crucial spring homebuying season.”