Mortgage rates climbed back above the 7% threshold this week as strong economic data stoked fears that the Federal Reserve may need to raise interest rates higher than previously expected.
Rates Hit Fresh Highs Not Seen Since December
The average 30-year fixed mortgage rate rose to 7.02% according to data from Freddie Mac, reaching levels not seen since mid-December when rates peaked at just over 7.08%. The increase comes on the back end of last week’s blowout January jobs report which showed 517,000 jobs added and unemployment falling to 3.4% – its lowest level since 1969.
The robust labor market data signals ongoing economic strength and inflationary pressures, leading investors to price in additional Fed rate hikes down the line. Rate lock data provider Optimal Blue also recorded a spike in rates, with the average 30-year conforming loan rate hitting 7.14% on Monday – a huge jump of 33 basis points from the previous Friday.
Ralph McLaughlin, chief economist at Kiavi, noted the jobs reports likely cemented additional rate hikes from the Fed:
“The January employment figures came in astronomically high, which will likely give the Fed the confidence it needs to continue raising rates aggressively to tame inflation…As a result, mortgage rates made their biggest upward move since December’s 75 basis point hike by the Fed.”
Housing Market Headwinds Mount
The surge in mortgage rates delivers another blow to the struggling housing market, just as some analysts were anticipating the start of the critical spring buying season. Applications for home purchases are already down 40% from last year as housing affordability plumbs new lows amid a supply crunch and years of runaway price appreciation.
Ivan Drury, senior manager of economic research at John Burns Real Estate Consulting, thinks spring buyer demand is “all but dead” with the latest rate spike:
“Monthly payments are now 42% higher than they were just one year ago which has all but choked off spring demand as we enter the key seasonal home shopping window.”
|Month|30-Year Fixed Rate|Monthly Payment (On $350,000 Loan)|
|-|-|-|
|February 2023|6.32%$1,868|
|February 2024|7.14%$2,655|
As seen in the table above, monthly mortgage payments have surged over 40% in just the past year – adding over $750 per month in housing costs on the average loan. This drastic erosion in affordability is shutting an increasing number of buyers out of the market.
Redfin chief economist Daryl Fairweather says housing conditions probably need to deteriorate much further before finding a bottom:
“The Fed likely won’t feel comfortable stopping its rate hikes until home prices fall, which requires home sales to drop off substantially from today’s levels…There may not be much relief for homebuyers before 2024.”
All Eyes on Inflation Data
Markets will be closely parsing upcoming inflation reports, especially February’s Consumer Price Index (CPI) reading due out next month, for signs that the Fed’s barrage of rate hikes over the past year are beginning to successfully cool down the economy.
The central bank just raised the fed funds rate 0.25% earlier this month, bringing borrowing costs to a 15-year high of 4.5%-4.75%. But Fed chair Jerome Powell left the door open to additional hikes if stubborn inflation persists. Most economists expect rates to peak around 5%-5.25% later this year before the Fed pauses. But a hotter-than-expected inflation print could force policymakers’ hand to hike even further.
Bill Banfield, executive vice president of capital markets at Quicken Loans, thinks there’s a high probability that mortgage rates could spike north of 7% again in the coming months if inflation remains sticky.
“If inflation continues to be high or comes in hot for February, March or April, that will lead to market volatility that will push mortgage rates higher. I could absolutely see rates going back up over 7%.”
However, most housing experts don’t foresee mortgage rates staying above 7% on a sustained basis as signs of economic slowing should develop over the course of 2023. Once clear evidence emerges of declining inflation and jobs growth moderating, markets will likely price out additional Fed rate hikes, setting the stage for mortgage rates to fall back.
But in the meantime, Lawrence Yun, chief economist for the National Association of Realtors (NAR), summed up the near-term pain facing housing:
“Swiftly moving mortgage rates in recent months have spoiled many house hunters’ plans…Some families who were originally aiming to buy this spring are now temporarily sidelined from the market but still remain determined to own in the future.”
Outlook Going Forward
In summary, strong economic reports last week shocked mortgage rates back above 7% – slowing housing further and threatening fragile buyer demand just as the critical spring season kicks off. Rates are likely to remain elevated and volatile in the coming months amid uncertainty over how much higher the Federal Reserve will need to boost interest rates to get inflation under control. Home prices also face increasing pressure, although full-on declines are not expected at this point.
Eyes will remain locked on inflation and jobs data for clues as to where rates head next. But economists broadly think mortgage rates should moderate by late 2023 or early 2024 once the Fed brings its tightening campaign to an end. This could pave the way for some semblance of stability finally returning to the battered housing market next year. But in the short run, the affordability crunch suggests today’s resilient sellers’ market could turn more balanced or even shift slightly in buyers’ favor in many metros.
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