Mortgage rates held in check as recession fears mount

Mortgage rates latest data released Thursday by Freddie Mac, the 30-year fixed-rate average dropped to 5.7 percent with an average of 0.9 points. (A point is a fee paid to a lender equal to 1 percent of the loan amount. It is in addition to the interest rate.) It was 5.81 percent a week ago and 2.98 percent a year ago.

Freddie Mac, the federally chartered mortgage investor, aggregates rates from around 80 lenders across the country to come up with weekly national averages. The survey is based on home purchase mortgages. Rates for refinances may be different. It uses rates for high-quality borrowers with strong credit scores and large down payments. Because of the criteria, these rates are not available to every borrower.
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The 15-year fixed-rate average also moved lower, falling to 4.83 percent with an average of 0.9 points. It was 4.92 percent a week ago and 2.26 percent a year ago. The five-year adjustable-rate average rose to 4.5 percent with an average of 0.3 points. It was 4.41 percent a week ago and 2.54 percent a year ago.

“The rapid rise in mortgage rates has finally paused, largely due to the countervailing forces of high inflation and the increasing possibility of an economic recession,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “This pause in rate activity should help the housing market rebalance from the breakneck growth of a seller’s market to a more normal pace of home price appreciation.”

Since the start of June, the 30-year fixed average jumped 72 basis points before retreating this week. A basis point is 0.01 percentage point. The sharp spike has made homes less affordable and cooled sales, putting a damper on what had been a booming housing market.

The way financial markets are waffling between anxiety over inflation and trepidation over a recession is leading to the volatility in mortgage rates.

“Markets are struggling to price in the competing dynamics of persistently high inflation and the impact of Federal Reserve rate hikes,” said Paul Thomas, vice president of capital markets at Zillow. “The Fed has indicated they are focused on getting inflation under control through rate increases. But those rate increases will slow economic growth and that could lead to a recession. Views on the short-term increases in the federal funds rate drove interest rates up early this month, but rates declined from highs last week as recession concerns raised the potential for slowing rate increases in the future.”

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When investors are worried about inflation, they lose interest in buying bonds because the return on their investment is less when inflation is high. Inflation erodes the value of a bond’s future payments. Less demand causes bond prices to drop and yields to rise. Since mortgage rates tend to follow the same path as the 10-year Treasury yield, they also go up.

But in a recession, bonds are viewed as a safe investment. More demand for bonds causes prices to rise and yields to fall, which usually sends mortgage rates down. The yield on the 10-year Treasury, which peaked at 3.49 percent earlier this month, fell back to 3.1 percent as of Wednesday.

“With the drumbeat of a possible recession growing louder, investors have been seeking safer assets, driving bond yields lower again this week,” said George Ratiu, manager of economic research at Realtor.com.

It is worth noting that the last time the Federal Reserve acted this aggressively to tamp down inflation was during the 1981-82 recession when mortgage rates soared to an all-time high of 18.63 percent. While mortgage rates are expected to keep climbing, most economists don’t predict they will reach double digits.

Bankrate.com, which puts out a weekly mortgage rate trend index, found the experts it surveyed mixed on where rates are headed in the coming week. Forty-five percent say rates will move lower, 27 percent say they will stay the same, and 27 percent say they will rise.

Dan Green, chief executive officer of Homebuyer.com, expects rates to go up.

“Mortgage lenders are beginning to make weird choices,” Green said. “Interest rates will be down this week even if the market doesn’t necessarily warrant it.”

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But Elizabeth Rose, sales manager at Mortgage300, anticipates rates won’t move much.

“While uncertainty and volatility remain the norm, [Federal Reserve Chair Jerome H.] Powell speaks and says many things the markets like,” Rose said. “Powell sees a path back to the 2 percent inflation reading without harming the strong labor market. This is helping mortgage bonds improve along with weak GDP readings. … In the absence of inflation data coming in hotter than expected, I think rates will hold steady.”

Because rising rates have slowed demand for mortgages, lenders are struggling to generate business.

“Fewer people are getting mortgages because rates have gone up so much this year,” said Holden Lewis, a home and mortgage expert at NerdWallet. “First came the collapse in refinancing. Now fewer people are buying homes because of the impact of rising prices and mortgage rates. The decreased demand for mortgages means lenders compete for borrowers, making them reluctant to raise rates. This is a turnaround from a year ago when lenders were straining to meet demand.”

Mortgage applications were flat last week. According to Mortgage Bankers Association data, the market composite index — a measure of total loan application volume increased 0.7 percent from a week earlier.

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The refinance index rose 2 percent from the previous week but was 80 percent lower than a year ago. The purchase index held steady, rising 0.1 percent. The refinance share of mortgage activity accounted for 30.3 percent of applications.

“The mortgage market is experiencing some momentum in June, with applications up slightly for the third straight week,” Bob Broeksmit, MBA’s president and chief executive, wrote in an email. “A decline in mortgage rates prompted the uptick in refinance and purchase applications. Moderating home-price growth and homebuyers’ inability to borrow as much with rates above 5 percent, have caused the average purchase loan amount to decline nearly $50,000 since hitting a peak of $460,000 in March 2022.”

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