Mortgage rates this week jumped to their highest level since 2011,
signaling a shift from a period of ultracheap loans to a higher-rate
environment that could slow home price appreciation and squeeze first-time
The average rate for a 30-year fixed-rate mortgage rose to 4.61% this
week from 4.55% last week, according to data released Thursday by
mortgage-finance giant Freddie Mac .
The jump this year reflects an abrupt departure from a long period of
declining rates that began during the financial crisis. Rates bottomed out in late
2012 at 3.31% and clocked in at 3.99% as recently as January.
The spike this year has
been faster than many economists predicted as a surging economy, the
prospect of wage gains and a steep rise in prices for commodities such as
lumber and gasoline stoke inflation worries.
“There’s been a regime shift in the way the market is thinking about
rates. We’ve been waiting for the period [of higher rates] for a while and now
it’s finally happening,” said Sam Khater, chief economist at Freddie Mac.
The concern among economists is that higher rates will prompt homeowners
to keep their low-rate mortgages rather
than trade upfor better properties. As rates approach 5%, the risk of the
phenomenon known as rate lock grows, economists said.
A one percentage point increase in rates can lead to a reduction in home
sales of 7% to 8%, according to Lawrence Yun, chief economist at the National
Association of Realtors. The recent increases in home prices and mortgage rates
could especially hurt first-time and moderate-income borrowers, economists
So far, price gains have shown little sign of slowing. The S&P
CoreLogic Case-Shiller National Home Price Index, which measures typical home
prices across the nation, rose 6.3% in February, up from a 6.1% year-over-year
increase in January.
What might seem like a small increase in mortgage rates can have a big
effect on monthly payments. A 4% rate on a $250,000 loan translates to a
monthly payment of $1,194, according to LendingTreeInc., an online loan
information site. At 5%, the monthly payment would go up to $1,342, excluding
taxes and insurance.
The monthly increase is more pronounced on higher-priced homes.
According to LendingTree, a 4% rate on a $500,000 loan would create a monthly
payment of $2,387. At 5%, the monthly payment would swell to $2,684.
Tim and Keri Youse recently made an offer on a home in the Baltimore
area for $250,000. The higher interest rates meant they focused their search on
homes priced lower than what they looked at when they first thought about
buying in 2016.
Mr. Youse said he expected rates to keep rising, which motivated him to
make an offer.
“If I thought mortgage rates were going to trend downward, I might hold
off a little bit,” said Mr. Youse, a 42-year-old graphic designer. “But
everything I hear is that rates are going to go up and up, and you might as
well get the house now.”
The yield on the 10-year Treasury note, which tends to influence the
30-year mortgage rate, has been rising even more steeply recently. The yield on
the 10-year Treasury note edged above 3.1% this week, its highest close since
What’s more, the Federal Reserve has signaled it will raise short-term
rates three to four times this year and potentially three times next year.
Mortgage purchase applications fell 2% in the week ended May 11, the
fourth straight weekly decrease, according to the Mortgage Bankers Association.
While in a typical market buyers can simply choose to buy a smaller,
less expensive home, that is a challenge in today’s market because inventories
are near all-time lows.
“The problem in today’s market is there aren’t many affordable homes on
the market. Buyers have less wiggle room,” said Nela Richardson, chief
economist at Redfin.
For Jared Clark, a 27-year-old music teacher in the Phoenix area who is
thinking about buying a home, the size of the monthly bill is a big concern—but
mortgage rates aren’t the issue.
“I’ve got so much student debt at this point, a percentage point or two
on a mortgage is a drop in the bucket,” Mr. Clark said.
Mortgage refinancing activity, meanwhile, is drying up. The pool of
homeowners who would qualify for and benefit from a refi has shrunk by roughly
46% so far this year, according to mortgage-data and technology firm Black Knight Inc. At 2.29
million potential borrowers, this group is at its smallest since 2008.
For borrowers who have taken out mortgages in the past five years or so,
any rate-related incentive to refinance is “all but non-existent,” Black Knight
said in a recent report.
The Mortgage Bankers Association expects refinancings to decline 26%
this year, after plunging 40% last year.
That could prompt lenders to ease credit standards to try to increase the
volume of loans to new borrowers. Mr. Khater said standards are still high but
lenders should be cautious about easing them so late in the cycle, especially
since that could spur more demand in a market already suffering from tight
“If we get additional loosening of underwriting it’s just going to gin
up price pressures,” he said. “This is where you have to be a bit careful.”
here for the original article from The Wall Street Journal.