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Latest mortgage news: Rates retreat, might have already hit ‘cyclical high’

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The Federal Reserve on Wednesday moved aggressively to rein in inflation, announcing its second consecutive rate hike of three-quarters of a percentage point. Counterintuitively, the average rate on 30-year mortgages fell to 5.59 percent this week from 5.76 last week, according to Bankrate’s national survey of large lenders.

The Fed’s strong policy move normally would lead to rising mortgage rates. The central bank is ramping up efforts to fight inflation, which has remained high after a bout of pandemic stimulus. In June, annual price increases clocked in at 9.1 percent.

However, the central bank is coming on so strong that mortgage rates are being whipsawed by concerns that the U.S. economy will contract. The Fed doesn’t directly control fixed mortgage rates — the most pertinent number is the 10-year Treasury yield, and it has bounced around in recent weeks. Even so, high inflation all but forces the Fed to act aggressively, and it sets the tone for rates overall.

Mortgage rates have been on a wild ride as of late, briefly reaching 6 percent. The rate chart continues to look choppy — the Fed’s stance against inflation also could lead to a recession, and that could cause mortgage rates to retreat.

“The cumulative effect of this sharp rise in rates has cooled the housing market and caused the economy to start slowing, but hasn’t done much to lower inflation,” says Greg McBride, Bankrate’s chief financial analyst.

A year ago, the benchmark 30-year fixed-rate mortgage was 3.04 percent. Four weeks ago, the rate was 5.85 percent. The 30-year fixed-rate average for this week is 2.59 percentage points higher than the 52-week low of 3 percent.

The 30-year fixed mortgages in this week’s survey had an average total of 0.5 discount and origination points.

Over the past 52 weeks, the 30-year fixed has averaged 4.12 percent.

Where mortgage rates are headed

The new consensus around mortgage rates is that they’ve reached a plateau.

“Mortgage rates have dropped about half a percentage point in recent weeks, heading closer to 5.5 percent than the 6 percent rates we saw in June,” says Mike Fratantoni, chief economist at the Mortgage Bankers Association. “There is a tug-of-war in market expectations, between the persistently high inflation numbers and resulting rapid Fed hikes, and the increasing risk of a sharp slowdown and possible recession. As a result, mortgage rates may have already peaked and could stay between 5 percent and 5.5 percent through the remainder of 2022.”

For now, borrowers are continuing to feel the pinch, and some are being priced out altogether. The sharp rise in rates is part of the reason home sales have slowed. The National Association of Realtors (NAR) said Wednesday that its pending home sales index declined in June.

“Contract signings to buy a home will keep tumbling down as long as mortgage rates keep climbing, as has happened this year to date,” says Lawrence Yun, chief economist for the Realtors trade group. “There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize.”

In addition to its rate hikes, the Fed stopped its program of buying mortgage-backed securities, which was a move to stave off the coronavirus recession.

“We’re well aware that mortgage rates have moved up a lot, and you’re seeing a changing housing market,” Fed Chairman Jerome Powell told reporters in June. “We’re watching it to see what will happen. How much will it really affect residential investment? Not really sure. How much will it affect housing prices? Not really sure. We’re watching that quite carefully.”

As rates rise, the refinancing boom of 2020 and 2021 is firmly in the rearview. Rate-and-term refinance activity dropped by 80 percent in the first quarter of 2022, according to mortgage data firm Black Knight. The name of the game now for homeowners sitting on mounds of equity: cash-out refinances, which accounted for 75 percent of refinances in the first quarter.

Home purchases sluggish as rates rise

In a disconnect, home prices have been soaring even as mortgage rates rise. The median price for existing houses sold in June was $416,000, up 13 percent from June 2021, NAR reports, while sales have fallen for the fifth month in a row.

With each passing month, it appears that price appreciation is less strong,” Yun said recently.

Economists had expected rates to rise by the end of 2022, but the surge in rates in recent months has many forecasters wondering what comes next. As mortgage rates retreat from 6 percent, competition among homebuyers has eased somewhat.

Methodology

The Bankrate.com national survey of large lenders is conducted weekly. To conduct the National Average survey, Bankrate obtains rate information from the 10 largest banks and thrifts in 10 large U.S. markets. In the Bankrate.com national survey, our Market Analysis team gathers rates and/or yields on banking deposits, loans and mortgages. We’ve conducted this survey in the same manner for more than 30 years, and because it’s consistently done the way it is, it gives an accurate national apples-to-apples comparison. Our rates differ from other national surveys, in particular Freddie Mac’s weekly published rates. Each week Freddie Mac surveys lenders on the rates and points based on first-lien prime conventional conforming home purchase mortgages with a loan-to-value of 80 percent. “Lenders surveyed each week are a mix of lender types — thrifts, credit unions, commercial banks and mortgage lending companies — is roughly proportional to the level of mortgage business that each type commands nationwide,” according to Freddie Mac.

Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Edited by
Mortgage editor