Rising rates, home prices could create a breaking point - Movement Mortgage Blog

It’s probably safe to say that things escalated quickly. Mortgage interest rates are now surpassing 5% for some borrowers and there is no way to tell quite when rates will level out and stop rising. The latest Freddie Mac 30-year fixed-rate mortgage average came in at 4.72%. Freddie Mac’s economists note, “Mortgage rates have increased 1.5 percentage points over the last three months alone, the fastest three-month rise since May of 1994. The increase in mortgage rates has softened purchase activity such that the monthly payment for those looking to buy a home has risen by at least 20 percent from a year ago.”

The average does not mean that homebuyers will definitely be locked in at a 5% rate. Mortgage interest rates depend on a lot of factors including credit score, down payment and type of loan among other things. But it is very important to realize that as interest rates rise, your buying power goes down. Right now, high interest rates paired with quickly appreciating home prices mean that a lot of potential homebuyers could be priced out of the market. It is extremely important if you are trying to buy a home to stay in touch with your Movement Mortgage loan officer to ensure you’re still within your means before you fall in love with a home.

The outlook isn’t entirely bleak for the 2022 housing market. Because rising interest rates and quickly appreciating home prices will start to price out some buyers, it’s possible that demand will wane significantly enough to allow for more supply to trickle back into the market. Less demand and increased supply would start to level out the playing field slightly. 

The market is already seeing a stark drop with the Mortgage Bankers Association’s data showing total mortgage application (refinances and purchases) volume dropped by 41% year-over-year. Refinance demand alone was 62% lower annually. Purchases were down just 9% year-over-year, however, showing that rising rates have yet to significantly stifle the desire to buy a home. 




We’ve discussed this many times before but if you want to get an idea of where mortgage interest rates are moving you need to follow the 10-year Treasury note yield. The 10-year yield went below 1% on March 11 2020—the start of the COVID-19 pandemic—and then again on March 23 and stayed below 1% until January 2021. Fast forward to March 2022 and the 10-year yield jumped from 1.83% March 1 and finished above 2.3% March 31. At the start of trading Friday, April 8, the 10-year note yield was sitting at 2.613% and rising.

Part of the reason for the distinct uptick in the 10-year yield has been the Federal Reserve’s hawkish tone on increasing the federal funds rate to stifle inflation. The Fed instituted its first rate hike in 3 years in March when it increased the overnight lending rate by 0.25%. 

Now, Federal Open Market Committee members are indicating they would like another half-point hike at their next meeting and one Fed governor, Lael Brainard, went so far as to say she believes the Fed needs to rapidly reduce its balance sheet (for quick reference on the intricacies of the Fed’s balance sheet, check out this article).

The minutes from the Fed’s March meeting show that Brainard isn’t the only one pushing for a quick reduction in the balance sheet. There was a consensus for a $95 billion per month selloff comprising a maximum $60 billion in Treasurys and $35 billion in mortgage-backed securities (MBS). In total, the Fed wants to trim its balance sheet by about $9 trillion. 

Essentially, the Fed pumped money into the economy over the last two years by buying up $120 billion per month in bonds and MBS (MBS are securities backed by loans homebuyers take out to purchase a house). If the Fed rapidly reduces its balance sheet and sells off these assets, this will dramatically decrease the supply of cash in the economy. This is how the central bank controls the supply of money in the country. 

The next FOMC meeting is set for May 3-4 and it is very likely that members will vote to raise rates by a half point at that time. Keep in mind, investors in the stock market are already expecting this to happen so they’ve already priced that into the market.

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Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.