Average mortgage rates have increased for the past six weeks, and experts say that upward pressure is likely to continue, at least for the near future.
The trend started in early October, and since then, mortgage rate averages have increased every week but two, according to data from Freddie Mac.
The latest update from the mortgage giant placed the average 30-year, fixed-rate mortgage at 7.04%, a number higher than the previous week's average. It's the first time the average has surpassed the 7% threshold since the end of May. Similarly, the average 15-year, fixed-rate mortgage of 6.27% was also higher than the previous week.
Daily measures of mortgage rates have shown a little more volatility, bouncing up and down in the last few weeks. On Wednesday, for example, the daily 30-year, fixed-rate mortgage fell about 0.12%.
Even so, according to Mortgage News Daily, that figure has stayed above the 7% threshold since mid-December.
This development has stumped mortgage market watchers who have been keeping a close eye on market conditions, according to Melissa Cohn, regional vice president at William Raveis Mortgage.
“If you asked anyone at the beginning of 2024, rates would be at least a full percentage point lower than where they are today,” she said. “It’s the same thing if you ask the Federal Reserve where they thought the economy was going. In September, they thought we were heading into a much weaker economy.”
Unexpected growth
But the expected weaker economy has yet to fully materialize.
Recent data reports have indicated that the job market is still strong, and consumers are still spending – a lot. Though the latest data about price growth showed inflation is running at the rate investors expected, that speed is still higher than what the Federal Reserve would like to see in its target rate.
Taken together, the expectation-defying economy has changed the way investors are moving throughout the market, putting pressure on mortgage rates.
“The economy has basically confounded the markets,” Cohn said in an interview.
That’s because the mortgage market is more closely linked to the market for 10-year treasury bonds or the rate the government pays to borrow money from investors. And what is driving the 10-year Treasury rate up? Inflation, Cohn said.
“Bonds don’t like inflation,” she said. “And when the market senses that there’s inflation in the system, bond yields will go up. And when bonds go up, mortgage rates will go up as well.”
And for the most part, bond traders have had a good read on what to expect from inflation.
The effect of inflation on bonds, and in turn on the mortgage market, was especially apparent this week when the latest inflation numbers just about matched investor expectations. That was enough to bring some relief to the market, so bonds and mortgages moved down a bit.
But it will take more than one good reading to upend the current upward trend, according to Matthew Graham, chief operating officer of Mortgage News Daily.
“This can't singlehandedly change the narrative, even if it can serve as an ingredient in that change,” he said in a Wednesday post on Mortgage News Daily.
Even so, “any move back toward lower rates has to start somewhere,” Graham said in a separate post. “We won't know how long this one will last until we see the extent to which additional economic data supports the same conclusion.”
Investor uncertainty
There’s another event that’s confusing and worrying markets: next week’s inauguration.
Investors are watching closely to see what policies President-elect Donald Trump will implement. Some ideas he has proposed or floated could have negative effects on the Treasury bond and mortgage markets. In fact, that’s already imbuing a degree of caution into investor decisions, according to Ken Johnson, Walker Family chair of real estate at the University of Mississippi.
“Until some of these things wash out and get translated into day-to-day practices, what does it mean” Johnson said in an interview. “It induces uncertainty. And uncertainty drives rates up. It’s just another risk premium that you have to account for.”
If Trump does implement some of his proposed policies, there’s already evidence that they could widen the country’s budget deficit, which is already creating challenges for borrowing costs.
“We’ve got more debt than ever before that’s really sucking up all the money that people want to lend,” Johnson said. “Therefore, our mortgage rates have been going up now for three months when, ostensibly, they should be going down.”
All told, both Johnson and Cohn said the question is not so much if mortgage rates will ease from 7%, but when.
“Everything is still pointing toward lower long-term rates,” Johnson said. “The market is telling us there’s some room for this to come down. It’s just going to take some time.”