Yesterday the average 30 year mortgage interest rate hit a “generational” high. Most mortgage lenders are quoting the 30 year fixed mortgage interest rate at 7.50% or higher. This is rate not seen in the last 22 years. Ouch.
The rate is for the “average” borrower, meaning that borrowers with lower credit scores are seeing rates even higher than this. Many lenders are also quoting rates now with points to “buy down” the rate. A point is equal to one percent of the loan amount. It is an added fee that a borrower can pay and get a slightly lower rate. One point usually buys the interest rate down around 3/8%.
Will things get better? Unfortunately there is nothing on the horizon to indicate that. And most experts in the market are predicting high rates the remainder of this year and into 2024, with no real substantial rate relief until 2025.
It’s official. Most mortgage lenders are quoting the 30 year fixed mortgage interest rate today at 7.25% (7.48% APR). This is the highest they have been in all of 2023 and the highest since November 2022. Back in Nov 2022 they hit around 7.375%. So we are very close to the highest rate in about 21 years. Some forecasters see rates beginning to move lower before the end of 2023, while the more pessimistic estimators think we could be stuck in a similar range through most of next year. Either way, we aren’t going to see super low rates again for quite some time.
It was no surprise yesterday that the Federal Reserve raised the Fed funds rate 25 basis points. This is the highest that rates has been in 25 years. This now puts the prime interest rate at a shocking 8.50%! What will the Fed do in the future? Well, they didn’t give us one clue. They were completely closed lipped in their statement as to what their future thoughts are. Fed Chair Powell said they might raise rates at the next meeting, or the one after that, or maybe not. In my humble opinion, I think they are done raising rates.
As we all know, the mortgage industry is barely surviving right now. Lenders are very slow, business is hard to find. A huge part of that is how much higher interest rates are now versus the last couple years. Right now, 91.8% of U.S. homeowners with a mortgage have an interest rate below 6.0%. With current mortgage rates around 6.50%, no homeowners are refinancing and many borrowers are choosing to stay in their existing home rather than sell and buy a new home at a higher rate. This is one reason existing inventory is so very limited. Looking deeper at the statistics on rates accentuates this even more. 82.4% of mortgagees have a sub 5% rate, 62% have a sub 4% rate, and 23.5% have a sub 3% rate. Wow.
For the last week we have seen nothing but up for Mortgage Interest Rates. Not good for the housing market, especially as we enter the prime season of homebuying – spring and summer!!! How high are they going? Right now most lenders are quoting rates around 6.625% with some lenders as high as 7.0%. Dang! So what is the cause of this slingshot higher of rates?
In general, the market is realizing the possibility the Federal Reserve may have been right in its evaluation for the need to keep rates higher for longer. Recent economic data has confirmed the economy is stronger than expected. Consumers are still spending despite the higher cost of spending. This keeps an upward pressure on inflation – which is the enemy of mortgage rates. Keep fingers crossed that inflation gets in check!
During the past week the news organizations are alive with reports that there is a “new tax” that gives borrowers with lower credit scores a better interest rate than those with higher credit scores. This is categorically false. There are changes. But in no scenario will a borrower with a 640 credit score get a better mortgage interest rate than a borrower with a 740 credit score. So what is the truth?
The truth is that Fannie Mae and Freddie Mac did change their fee structure so that borrowers with lower credit scores will get a better mortgage interest rate than under their previous fee structure. And borrowers with higher credit scores will get a slightly higher interest rate than they did under the previous fee structure. But the higher credit score borrower will ALWAYS get a better rate than the lower credit score borrower.
Mortgage Interest rates had a great run last week. Friday was not great, but before Friday, we had reason to cheer and have hope for a great run downward. At the end of day Thursday, the rate drop was the best weekly drop in rates since back in November, 2022.
Things began to change on Friday last week. The jobs report was too good – showing the labor force was strong and growing, which is not good keeping inflation in check, and mortgage rates hate anything that causes inflation to rise. After all, that is what has caused the Fed to raise rates the crazy way they have been doing so since last year. By yesterday afternoon and this morning, rates are back up and erased those solid gains of last week.
Buckle up for tomorrow. It is the morning we see the Consumer Price Index (CPI) report. This is the most important monthly inflation report and can cause mortgage rates to react even more than the jobs report can.
This week began with mortgage interest rates moving higher. Not drastically, but definitely higher. For those hoping that the downward movement in rates last week would stick, the markets had other ideas.
Mortgage interest rates are affected by the volatile prices of mortgage backed securities (MBS). An MBS is essentially a bond that relies on mortgage loans as collateral. The bond market had been doing very well during the recent banking panic because investors sought safety, pulling money from stocks and putting them in bonds and cash. MBS and T-bills both were enhanced with cash.
But as the panic has calmed, investors have moved cash out of the bond market and back into stocks. This has put downward pressure on bond prices and upward pressure on yields and rates.
The Federal Reserve raised its key short-term interest rate by a quarter percentage point today. The decided to continue their same path, raising the short term rate to try to lower inflation. This is despite some financial turmoil following the collapse of two investment banks.
Some had thought maybe the Fed would not raise rates today. However, the Fed did acknowledge the bank collapses should constrain bank lending and weaken the economy and inflation. “You can think of (the crisis) as being the equivalent of a rate hike and perhaps more than that,” Fed Chair Jerome Powell said at a news conference. They also insinuated they might only raise rates one more time this year and then pause. And also hinted that one more rate increase might not happen.
Because of the positive talk by the Fed that inflation seems to be tempering, mortgage rates applauded and responded with moving slightly lower. Slightly. This was not a huge downward dive, but hopefully this will continue. If the economic reports over the next month show inflation continuing to soften, we should see mortgage interest rates also continue to improve.
The Federal Reserve uses its ability to raise and lower the Fed Funds Rate to tighten both financial conditions and lending standards. When they raise that rate, it results in reduced lending and investment, which leads to slowing economic activity, and that usually brings on a recession. The most recent events of two large investment banks failing, financial conditions and lending standards have quickly tightened even more. So with the Fed meeting today, will they continue to it’s trend of raising the Fed Rate? Or will they feel that combined with their raising rates over the last year and these recent bank failures the economy is slowing enough to curb inflation? We will know tomorrow about 2:00 pm ET.