Mortgage rates jump as inflation reality sets in
With no end in sight for the war in Iran, investors are growing increasingly nervous about how sky-high energy prices are impacting the U.S. economy.
The U.S. economy's inflation situation seemed to kick in with investors on Friday — and that's bad news for homebuyers looking to lock in a 30-year mortgage.
Mortgage rates climb again: The 10-year Treasury bond — typically the benchmark for mortgage rates — surged to its highest level in a year, hitting 4.59% in early afternoon trading on May 15. The 30-year fixed-rate mortgage tends to be two percentage points higher, with Mortgage News Daily (MND) pegging it at 6.62%.
Both have been sensitive to oil prices, which ticked up again on Friday. Stocks also fell around 1% in early afternoon trading.
Mortgage rates were relatively stable earlier in the week despite an ugly inflation report that showed prices rising 3.8% in April compared to a year ago. Wages are not keeping up with inflation, the report found, which means consumers are losing purchasing power.
Rates could have been even higher were it not for the ramp-up in purchases of mortgage-backed debt by Fannie Mae and Freddie Mac, according to Matthew Graham, MND's chief operating officer. "The more mortgage debt they buy, the better it is for mortgage rates relative to benchmarks like U.S. Treasuries," Graham wrote in an online post.
Elevated oil prices expected to continue: With this week's U.S.-China summit now over, investors appeared to be discouraged by the lack of a resolution on the war in Iran, which is about to stretch into its 12th week. Many are now betting that oil prices will remain elevated for longer, The Wall Street Journal reported — and investors also believe there is a 50% chance that U.S. interest rates will end the year higher than they are now.
What this means for real estate: The rise in rates comes as the housing market attempts to get back on track after a sluggish spring start. But homebuyers appear to be looking past the current market conditions, with pending sales up in recent weeks.
Elevated mortgage rates have led to an increase in the use of home equity lines of credit (HELOC), according to Kyle Bass, production business manager at Refi.com. In an online post, Bass noted that some homeowners are using this as an option to tackle home improvements while maintaining the ultra-low rates they nabbed during the pandemic.
"Home price growth has expanded borrowing capacity for existing homeowners. As refinancing became less attractive, HELOCs emerged as a flexible alternative," Bass said.