Mortgage rates are beginning to feel the impact of the debt-ceiling standoff, jumping higher for the second week in a row amid the uncertainty.
The 30-year fixed-rate mortgage averaged 6.57% in the week ending May 25, up from 6.39% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 5.10%.
“The U.S. economy is showing continued resilience which, combined with debt ceiling concerns, led to higher mortgage rates this week,” said Sam Khater, Freddie Mac’s chief economist.
Mortgage rates topped 5% for the first time since 2011 a little more than a year ago and have remained over 5% for all but one week during the past year. Since then they have gone as high as 7.08%, last reached in November. Since mid-March, rates have gone up and down but have stayed under 6.5%.
But with current uncertainty, rates tipped over 6.5% this week. Zillow projects that home buying costs could spike by 22% and mortgage rates could top 8% should the US default on its debt. Even the threat of a deal not being reached is having a financial impact on people. (Here’s how to be prepared.)
The rate climbed this week following the trend of 10-year Treasury yields, as investors closely track the ongoing debt ceiling negotiations and evaluate the possible direction of Federal Reserve interest rate policy, said Jiayi Xu, an economist at Realtor.com.
“Although the probability of a default remains low, even the fears and panic related to a potential government default could cause creditors to ask for higher interest rates from the US Treasury, resulting in a significant increase in various borrowing costs, including mortgages,” said Xu. “Resolving the debt impasse sooner rather than later would mitigate potential adverse effects on the housing market, which is already contending with high prices and elevated mortgage rates.”
Federal Reserve rate moves
If that weren’t enough, investors are also looking at the Federal Reserve’s actions, as revealed in the minutes released from May’s meeting.
“Although investors anticipate a pause at the upcoming meeting after ten consecutive rate hikes, the minutes revealed a sense of uncertainty regarding the future direction of monetary policy,” said Xu. “Generally, officials concurred on the importance of closely monitoring incoming economic data and maintaining flexibility leading up to the next policy meeting.”
The Fed does not set the interest rates that borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
Home buyers remain sensitive to mortgage rate spikes, with mortgage applications dropping last week, according to the Mortgage Bankers Association.
“Ongoing volatility in the financial markets has pushed mortgage rates higher recently, contributing to weaker activity for purchase and refinance applications,” said Bob Broeksmit, MBA president and CEO. “Prospective sellers continue to be reluctant to jump into the market because of still-high mortgage rates that would replace their existing low rate mortgages.”
High prices and elevated mortgage rates have prompted buyers to seek more affordable options, said Xu.
“Although the national housing market is experiencing a slow spring, there is growing competition in relatively affordable markets, particularly in the Northeast and Midwest regions,” said Xu. “As more and more buyers flock to relatively affordable places, it further reduces the opportunities available for first-time home buyers.”
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit.