Why industry watchers expect mortgage rates to fluctuate

The Federal Reserve‘s decision to raise the federal funds rate by 25 basis points on Wednesday signaled that officials are still focused on bringing down inflation to 2% while monitoring how much recent bank failures slow lending in the economy and cool demand. 

Mortgage rates, which climbed upward one day and went down the next in the wake of the recent wave of bank failures, will continue to be volatile before it stabilizes, industry watchers said. 

“The volatility can be pinned on uncertainty about the stability of the banking system and the course of the Federal Reserve’s inflation-fighting campaign,” Holden Lewis, home and mortgage expert at NerdWallet, said. “As that uncertainty drains away, mortgage rates will have smaller day-to-day swings.”

Over the past two weeks, investors have considered Treasures a safe haven amid the banking system turmoil. The 10-year Treasury yields, which act as a benchmark for mortgage rates, has been fluctuating, dropping to as low as 3.39% from nearly 4% in the two-week period. 

“The flight to safety caused by the banking concerns caused mortgage interest rates to fall, while concerns that market participants may pull back from investing in mortgage-based assets have caused rates – particularly on jumbo loans – to increase,” Marty Green, principal of residential mortgage law firm Polunsky Beitel Green, said in an e-mailed response. 

In return, rates will continue to fluctuate over the coming weeks as incoming data changes and market participants adjust to the new reality as it unfolds, Green projected. 

Logan Mohtashami, lead analyst at HousingWire, expects short-term interest rates to fall because the 10-year yield tanked lower during Chairman Powell’s press conference — and afterward.

“We are once again at a key critical area of the 10-year yield, and if we can break this level, the short-term rates have room to go lower,” Mohtashami said.

Mortgage rates declined for the second week in a row, with the 30-year fixed rate dropping to 6.48%, the lowest level in a month, according to the Mortgage Bankers Association (MBA). Optimal Blue data show the 30-year fixed rates at 6.538% on Tuesday at HousingWire’s Mortgage Rates Center. Rates were lower at 6.45% on Wednesday on Mortgage News Daily.

​​In a notable shift this month, led by the sudden failures of Silicon Valley Bank (SVB) and Signature Bank, the central bank’s policy statement removed the reference to “ongoing” hikes and noted instead that “some additional policy firming may be appropriate.”

Either way, this means that interest rates will likely remain elevated, Hannah Jones, economic data analyst at Realtor.com, noted.

Borrowing money will be relatively expensive, “including taking on a mortgage borrowing for a home purchase,” Jones said.  

What does it mean for buyers, sellers? 

The central bank made it clear that the economy needs to lose more steam, as inflation “remains elevated” and job gains are “robust,” according to the latest policy statement.

Inflation measured by the Consumer Price Index (CPI) rose 6% in February from a year ago, down from January’s 6.4%. In addition, U.S. employers added 311,000 last month, outpacing expectations.

The good news is that the continued strength of the job market means that both sellers and buyers are still in a favorable financial position heading into the spring housing market, Jones noted. 

“The looming question over the housing market revolves around how buyers and sellers will reach agreement on pricing in an environment of higher borrowing costs, and if that will be motivating enough for other homeowners to list their properties,” Jones said. 

The recent drop in mortgage rates fueled existing home sales, which rose for the first time in a year.

After dropping for 12 months, existing home sales rebounded in February, climbing 14.5% month over month to a seasonally adjusted annual rate of 4.58 million homes, according to the National Association of Realtors (NAR). 

When rates stabilize, home sellers will have to make peace with the fact that they’re going to trade the low interest rate on their current house with a higher rate on their next house, Lewis projected. 

“Home buyers should accept that if they wait for interest rates to fall substantially, they might wait longer than they expect,” Lewis said. 

Home prices, which in February posted the first yearly decrease in 11 years, won’t be impacted by the Fed’s quarter-point increase, Green noted.

The national median existing-home sale price fell 0.2% in February from the previous year to $363,00 — the first year-over-year decline since February 2012. Median prices were down 12.3% from a record high in June. 

Green expects that there may be some softening of pricing in jumbo markets instead, should an anticipated pullback by banks and other lenders in the space comes to fruition. 

“Some real estate markets may also continue to see some softening of prices, but the Fed’s decision today probably will do little to change that dynamic,” he said. 

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