Mortgage Rates Spike to a 13-Year High as Fed Cites Plan to Offload Bonds

Home loan rates rose this week to the highest level in nearly 13 years after the Federal Reserve hiked its benchmark rate and laid out a plan to reduce the almost $6 trillion in Treasuries and mortgage bonds it purchased in the first two years of the pandemic.

The average rate for a 30-year fixed mortgage rose to 5.27%, the highest since August 2009, from 5.1% last week, Freddie Mac said in a report on Thursday. The average 15-year fixed rate increased to 4.52%, the highest since 2010, from 4.4%, the mortgage financier said.

The Fed hiked its benchmark rate by half a percentage point on Wednesday, the biggest single move in 22 years, and said it would sell $45.7 billion of bonds in each of the next three months, ramping up to $95 billion in subsequent months. The Fed is tightening the loose monetary policy it adopted to support the economy during the pandemic to now focus on taming the worst inflation in four decades.

The resulting spike in bond yields, which drive mortgage rates, means homebuyers are paying interest rates that are more than two percentage points above the year-ago level, according to Freddie Mac data. That’s going to chill home-price growth but isn’t likely to cause prices to fall, said Sam Khater, Freddie Mac’s chief economist.

“While housing affordability and inflationary pressures pose challenges for potential buyers, house price growth will continue but is expected to decelerate in the coming months,” he said.

One factor supporting continued price growth – albeit at a slower pace than last year – is the dearth of properties for sale, said Lawrence Yun, chief economist of the National Association of Realtors. The inventory of homes on the market dropped to the lowest level ever recorded in January and February, according to NAR data.

The median U.S. home price likely will increase 8.2% this year, slowing from a record 17% advance in 2021, said Yun.

Higher mortgage rates probably will chill transactions, in addition to slowing price gains, he said. Home sales likely will fall 9% to 5.57 million this year after gaining 8.5% last year, Yun said.

“The sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity,” he said.

While home sales will decrease, Yun said he expects the economy to keep growing. GDP probably will rise 2.2% this year compared with a 4.7% gain in 2021, he said.

The unemployment rate probably will average 3.7% in 2022, compared with 5.1% last year and 8.1% in the first year of the pandemic.