It’s been a wild ride for mortgage rates so far in 2022.
Since January 3rd, rates are up nearly a full percentage point.
The most recent reading of 7.5% inflation, coupled with the Federal Reserve’s statements of rate hikes and balance sheet reduction have really impacted the bond markets, including mortgage-backed securities and mortgage rates in general.
When you couple that with the Federal Housing Finance Agency increasing it’s mandatory fees for financed 2nd home transactions and extremely tight housing inventory here in the west, it’s a bit of tough sledding out there right now for would-be borrowers.
To put this in perspective, mortgage rates are now where they were in May of 2019.
Let’s take a look at the reasons…
Inflation and Mortgage Rates
Inflation in the United States picked up its pace once again, accelerating to an annual 7.5 percent in January, the highest rate in 40 years and above analysts’ expectations, according to data released by the Bureau of Labor Statistics (BLS).
January’s acceleration in the Consumer Price Index (CPI), which reflects inflation from the perspective of end consumers, marks the eighth straight month of prices rising faster than 5 percent year-over-year and a faster pace than December’s 7.0 percent pace.
Per Tom Ozimek of the Epoch Times: “Not only is January’s annual pace of CPI inflation the highest since February 1982, when it hit 7.6 percent, it is also far above the Federal Reserve’s target of 2 percent as reflected in a separate but related inflation gauge, pressuring policymakers to tighten loose monetary settings to knock some of the wind out of surging prices.”
When inflation rises, the value of mortgage-backed bonds decreases. This causes these bonds to become a less attractive investment. So, interest rates must rise to keep investors buying. Higher rates on mortgage bonds translate to higher consumer mortgage rates…and that’s what we are seeing today.
The Federal Reserve
Markets are in a state of increased nervousness as the Federal Reserve is changing its focus to a much tighter stance. Fed leaders have failed in their assessment that the inflation we are seeing is “transitory”…and are now in panic mode.
The Fed has also announced an end to quantitative easing—the central bank’s program of buying Treasury securities—and has signaled a rapid pivot to quantitative tightening (QT), the sale of Treasury securities from the Fed’s bloated portfolio.
Brian McCarthy of the Epoch Times states, “Markets are right to be unsettled by the Fed’s shift in interest rate policy, which has been effected with all the deftness of a dozing driver yanking the steering wheel, as he awakens to the expanding headlights of an 18-wheeler bearing down on him on a dark country road.”
Essentially, The Federal Reserve has bungled their management of inflation and now have to make severe changes to offset the damage. This brings market instability and increased mortgage rates.
2nd Homes and Mortgage Rates
Mortgage interest rates and fee structures are increasing for second home financing, thanks to the Federal Housing Finance Agency (FHFA).
The FHFA has announced targeted escalations to Fannie Mae and Freddie Mac’s upfront fees for second home loans.
In a statement, FHFA Acting Director Sandra Thompson said the fee increases are to provide better access to mortgages for first-time and low-income borrowers, as well as strengthen Fannie Mae’s and Freddie Mac’s balance sheets.
For mortgages on 2nd homes, they will now look nearly identical to investment properties in terms of rates and fees.
Essentially, this appears to be the FHFA’s attempt at revenue redistribution. They will be charging more for 2nd home financing in order to facilitate increased participation in first-time and low-income borrower programs.
You can find out more on this here…
The New Normal
Mortgage rates hit their highest level since before the pandemic began this week. Rates are up over .75% since the beginning of January and up over 1% since their all-time lows last year.
“The normalization of the economy continues as mortgage rates jumped to the highest level since the emergence of the pandemic,” Sam Khater, Freddie Mac’s chief economist, said in the report. “Rate increases are expected to continue due to a strong labor market and high inflation, which likely will have an adverse impact on home buyer demand.”
Essentially, the rates that were seen last year (2.75% for a 30-year fixed mortgage) just aren’t available today…and borrowers need to be willing to accept that fact.
Some Perspective
With that said, today’s mortgage rates are still extremely low relative to historical norms.
Take a look at this chart, showing average mortgage rates since 1972 (courtesy The Mortgage Reports):
Rates in the 3% to 5% range are very, very low compared to those in recent history.
This means that although rates might not be in the 2% range (as they were at times last year), today’s mortgage rates are clearly are advantageous to borrowers.
Would you like to find out more? Contact me to discuss your current situation and how you might be able to take advantage of today’s market. It would be my pleasure to help you!
