‘Mortgage rates are likely to push toward 5% before the end of the year’: Rates soar to highest level in over 3 years, putting pressure on home buyers

Mortgage rates are racing toward 5% as the Federal Reserve’s expected trajectory for future rate hikes becomes clearer.

The average rate on a 30-year fixed-rate mortgage was 4.42% as of the week ending March 24, representing an increase of 26 basis points from the previous week, Freddie Mac FMCC, -1.17% reported Thursday. One basis point is equal to one hundredth of a percentage point, or 1% of 1%.

Last week was the first time since May 2019 that the interest rate on this benchmark mortgage product had surpassed 4%. Following the steady rise of bond yields, including that on the 10-year Treasury TMUBMUSD10Y, 2.363%, rates rose even higher.

To put these increases in perspective: This was the largest two-week gain for the 30-year mortgage rate since 2009, and one of the largest such gains in history, according to historical data from Freddie Mac stretching back to the 1970s.

The average rate on the 15-year fixed-rate mortgage increased 24 basis points to 3.63%, while the 5-year Treasury-indexed hybrid adjustable-rate mortgage rose 17 basis points to an average of 3.36%.

Of course, many Americans are already seeing interest rates that are much higher on home loans, given that the numbers reported by Freddie Mac are averages. “The main takeaway is that mortgage rates are likely to push toward 5% before the end of the year, with lenders anecdotally reporting quotes around 4.75% for the 30-year fixed rate,” said George Ratiu, manager of economic research at Realtor.com.

All eyes are on the Fed

Investors and lenders are reading the tea leaves as the Federal Reserve considers its next move. The central bank hiked rates for the first time since 2018 earlier this month, but already members of the central bank’s committee that guides interest rate policy are considering even more substantial hikes in the months to come.

On Monday, Fed Chairman Jerome Powell said that the bank would consider rate increases larger than 25 basis points in the coming months if they are necessary to tame inflation.

“Investors will be focused on any clues from the Fed regarding the magnitude of future rate increases and the pace of balance sheet reductions, which could further impact rates in the coming weeks,” said Paul Thomas, vice president of capital markets at Zillow Z, +1.19% ZG, +1.26%.

The timing of these increases could throw a wrench in the housing market’s gears just as the popular spring home-buying season is getting underway. Already, a family buying a median-priced home will be spending over $300 more per month on their monthly mortgage payments than they would have if they had purchased a home a year ago, according to Realtor.com, reflecting both the run-up in mortgage rates and home prices.

“For buyers and sellers, this spring will offer a period of transition, in which high prices will combine with rising interest rates to challenge budgets already contending with high inflation,” Ratiu said, adding that there are already “early signs of market adjustment, with sales of both new and existing homes down.”

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