WASHINGTON, DC (CNN) Mortgage rates edged higher for the second straight week after falling for four weeks. Inflation is getting hotter making interest rates more volatile with expectations to hover in the 6% to 7% range over the next few weeks.
The 30-year fixed-rate mortgage averaged 6.32% in the week ended February 16, up 6.12% the week before, according to data from Freddie Mac released on Thursday. A year ago, the 30-year fixed rate was 3.92%.
After rising for most of 2022, mortgage rates have trended lower since November as various economic indicators suggested inflation may have peaked. But a stronger-than-expected jobs report and a CPI report that showed inflation is only moderately easing suggest the Federal Reserve may hike interest rates further in a bid to fight inflation.
Inflation keeps mortgage rates volatile, said Sam Khater, Freddie Mac’s chief economist.
“The economy is showing signs of resilience, driven largely by consumer spending, and interest rates are rising,” Khater said. “Overall housing costs are also increasing and are therefore affecting inflation, which continues to persist.”
The average mortgage rate is based on mortgage applications Freddie Mac receives from thousands of lenders across the country. The survey only includes borrowers who are paying back 20% and have excellent credit ratings. Many buyers who invest less upfront or have less than ideal credit scores pay more than the average rate.
Inflation cooling but still hot
Investors digest the latest economic data, said George Ratiu, Realtor.com manager of economic research.
The Fed doesn’t directly set the interest rates that borrowers pay on mortgages, but its actions affect them. Mortgage rates typically follow the 10-year Treasury yield, which moves based on a combination of anticipation of Fed action, what the Fed is actually doing, and investor reactions. When government bond yields rise, mortgage rates rise too; when they fall, mortgage rates tend to follow.
“Although the Fed has signaled that it will hike rates further this year, the steps are expected to come in 25 basis point increments, a less aggressive tightening than in 2022,” Ratiu said. “The central bank admits that it sees its monetary policy actions having a tangible effect on inflation. The CPI data to be released this week appear to confirm the bank’s views.”
At the same time, he said, many companies expect the economy to enter a recession as a result of the Fed’s rate hikes, even amid data showing continued resilience.
“This anticipation is becoming more evident with the growing number of companies resorting to layoffs to hedge against a potential economic downturn,” he said. “People who are laid off are cutting back on spending, and even those who are still employed may do the same for fear of losing their jobs, potentially driving consumer spending into a downward spiral.”
Homebuyers should expect interest rates to remain elevated
For home buyers, the cost of financing a home is expected to increase.
Interest rates have already been rising in recent weeks, which has led to a drop in mortgage applications. According to the Mortgage Bankers Association, applications last week were down 7.7% from the previous week.
According to the MBA, buyers are sensitive to interest rates.
“Purchase applications fell to their lowest level since the beginning of this year and were more than 40% lower than a year ago,” said Joel Kan, MBA’s vice president and associate chief economist. “Prospective buyers remain very sensitive to current levels of mortgage rates, which are more than two percentage points higher than last year’s levels and have significantly reduced buyers’ purchasing power.”
Mortgage rates are likely to hover in the 6% to 7% range over the next few weeks, Ratiu said.
For housing markets, he said, “the recovery in interest rates is leading to higher mortgage payments and increasing the pressure on homebuyers.”