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Beleaguered house hunters are now watching mortgage rates spike, too

Until a couple of weeks ago, economists had largely assumed that rates had a while to go before they hit 4 percent, let alone come closer to 5 percent.
Image: New Home Construction Ahead Of Housing Start Figures
A contractor works on the framing of a house under construction in the Norton Commons subdivision of Louisville, Ky,, on Feb. 8.Luke Sharrett / Bloomberg via Getty Images file

U.S. shoppers have faced sticker shock as goods from cars to steak to gasoline have gotten much costlier, in some cases very rapidly.

Now, consumers can add mortgages to the list. While interest rates are still quite low by historical standards — the average mortgage rate was in the double digits for most of the 1980s — economists say the sudden jump could be a shock to buyers and potentially the broader economy. 

The most common average interest rate jumped by more than half a percentage point since March 10, according to Freddie Mac’s weekly Primary Mortgage Market Survey. That amount — 0.57 percent, to be precise — might not sound like very much, but as mortgage rate movements go, a leap of more than half a percentage point in two weeks is eye-catching.

This data is tracked to the hundredth of a percentage point, or basis point. In any given week-to-week stretch, average rates move up or down in increments that are often less than 10 basis points, or one-tenth of one percent. The average rose above 4 percent for the first time since 2019 only a week ago, when it ticked up to 4.16 percent on March 17.

“This is a volatile time in markets,” said Mike Fratantoni, the chief economist at the Mortgage Bankers Association. “Rates are jumping more than would be typical. For a potential borrower, that’s really challenging.”

With access to data feeds that refresh continually throughout the day, Fratantoni is watching the spike happen in real time. "If you look over the last couple of days, rates have continued to move up, [even] from hour to hour,” he said. 

A steady climb

Rates for all types of mortgages have been ticking up since the beginning of 2022, according to the MBA and government agencies. According to Freddie Mac’s survey, which tracks current rates quoted by lending institutions, the average rate for the week ending January 6 was 3.22 percent for the most common type of mortgage loan, a 30-year, fixed conventional loan, which has a 2022 cap of $647,200 in all but the priciest markets in the United States. 

A borrower seeking that type of mortgage today — less than three months later — would have an average rate of 4.42 percent, nearly one-and-a-quarter percentage points higher.

Until a couple of weeks ago, economists had largely been operating under the assumption that rates had a while to go before they hit 4 percent, let alone come closer to 5 percent. But rising inflation, aggravated by the expectation that the Russia-Ukraine conflict will drive up global energy, food and other commodity prices, has pushed policymakers in recent days to accelerate their plans to normalize the economy. 

“The Federal Reserve really has shifted to becoming much more aggressive with the stance of monetary policy,” Fratantoni said.

Speaking at a conference on Monday, Federal Reserve Chair Jerome Powell said the central bank was willing to hike rates not only more often, but more steeply, if economic conditions warranted it — and market participants are taking him seriously: The CME FedWatch Tool shows a 68 percent probability that the Fed will raise rates by half a percentage point at its May meeting, with a 95 percent probability that policymakers will push the Fed’s benchmark overnight lending rate to 2 percent or above by the end of 2022.

The Fed also spent roughly two years buying up billions of dollars monthly in mortgage bonds — a security backed by mortgage-based assets — part of a series of steps, some of them unprecedented, to shore up an economy threatening to buckle under the weight of a pandemic. How and how fast it unwinds those holdings are other open questions making investors jittery. 

“If the Fed’s not going to be in the market buying billions of mortgage-backed securities every day, you have to think about who the next investor is — who is going to pick up those bonds?” Fratantoni said. “There’s some uncertainty about who that would be.”

The quick rise in rates is bad news for aspiring homebuyers who already must contend with scarce inventory, bidding wars and higher prices in many markets. “Given the numbers and additional costs that we’re looking at, the vast majority of first-time homebuyers are going to be pushed out of this market and will have to wait,” said David M. Dworkin, the president and CEO of the National Housing Conference, a nonprofit housing advocacy group. “Most first-time homebuyers — and certainly first-generation homebuyers — are going to struggle,” he said. 

Evidence suggests that the climbing costs — even before the 26 basis-point leap — are starting to give buyers pause. Sales of new homes fell for the second month in a row in February, catching forecasters by surprise.

The cost of everything

Economists worry about the broader ripple effects of a cooling housing market because buying a home is a catalyst for spending. A whole retail ecosystem of furniture, appliance and home improvement stores thrives when housing turnover is robust, as do skilled tradespeople, like carpenters, plumbers and electricians. 

Although analysts say it is hard to tease out whether homeowners are buying pallets of patio paving stones or leather sectionals because they have new space to spruce up and adorn, the boost is significant. “We use a rough number of 10 percent — almost everyone who buys a house spends that much in the first year,” said Dave Marcotte, the senior vice president of operations for strategic advisory services for the Americas at the retail consulting firm Kantar. 

Marcotte said there are a few key drivers. “In the process of buying, they catalog what’s wrong with the house — if the walls need to be repainted, if there’s a leak in the basement, whatever,” he said. In addition to money spent on repairs and remodeling, big purchases like furniture sets and home entertainment systems also contribute to such ancillary economic activity.

Such activity is in jeopardy if the higher cost to service mortgage debt leaves would-be buyers unwilling to purchase or unable to afford homes.

“If you have less homes purchased, you’re going to have less of some of this knock-on consumer spending that occurs,” said Tendayi Kapfidze, the chief economist at U.S. Bank.

“With high rates, everybody’s budgets just went down, and some people have exited the market altogether. It’s tougher.”