Benchmark Mortgage Rate Ticks Back Up, Poised to ClimbJune 9, 2022
Having inched down to 5.09 percent last week, the average rate for a conforming 30-year mortgage has since ticked back up to 5.23 percent which is back to within 7 basis points (0.07 percentage points) of the 670-week high it hit last month.
As such, the current 30-year rate is now 227 basis points, or 77 percent, higher than at the same time last year with the average rate for a 5-year adjustable rate mortgage (ARM) having inched back up to 4.12 percent, which is over 60 percent higher than at the same time last year and 55 percent higher than the average 30-year rate in January of 2021.
And with the rise in rates, mortgage application volume in the U.S. has dropped to a 22-year low, with purchase volume down over 20 percent, year-over-year. Or as we outlined six months ago, when the average 30-year rate was closer to 3 percent, the projected rate hikes, which have since materialized, would translate into “higher mortgage rates, less purchasing power for buyers and downward pressure on home values.”
At the same time, the probability of the Federal Reserve raising interest rates by another two (2) full percentage points by the end of the year, based on an analysis of the futures market, is currently running around 85 percent, “which should translate into even higher mortgage rates, less purchasing power for buyers and downward pressure on home values.” We’ll keep you posted and plugged-in.
Comments from Plugged-In Readers
Another voice saying that interest rates may need to go up far higher then some people are expecting:
“To better contextualize the current run-up in inflation, this paper constructs new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the post-war period. Using these series, we find that current inflation levels are much closer to past inflation peaks than the official series would suggest. In particular, the rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using today’s treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics. To return to 2 percent core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker.”
The paper finds that prior to 1983 reported inflation was overstated if measured using the same methodology as being used today, so that when using a consistent methodology we are closer to 1970’s style inflation than it would seem. And thus we will be more likely to need 1970’s scale measures to bring inflation back down. In 1983 the BLS changed from using actual housing costs to using Owners Equilivent Rent as a measure of housing expenses feeding into inflation calculations. This seems to be the biggest methodology change they found in inflation calculations.
I think you’re going to have a hard time convincing people – well people on this board anyway – that housing inflation , aka “appreciation” , is anything but wonderful. And to the extent that many newpapers, which are still influential – even if not what they once were – still derive a lot of revenue from the real estate industry, (which has a vested interest in promoting that idea) it’s going to me hard to move the conversation.
It’s tangential to the main conclusion of the paper, but the main reason for the 1983 change to using OER (Owners Equivalent Rent) in inflation calculations was precisely to try and separate out housing appreciation from shelter cost inflation. The idea being that housing is part investment and part consumption. You’re right that if housing does well as an investment then many people will rightly view that as a positive (and that isn’t inflation). But if the consumption cost of a given quality of housing goes up, that is negative (and inflationary). Essentially they try and split total home-ownership costs into “rent like” costs and investment.
The problem, of course, is a house is both “consumed” and invested in, and yet we can’t have the one use go up : good without the other going up too bad…splitting up the components in the index notwithstanding.
To the moon…
I would guess the Fed is going to raise one full % when they meet this week.
Looks like mortgage rates are headed to 6% before the end of June.
Ok, I will go on record as taking the other side. The FOMC will not raise interest rates more than fifty basis points when they meet this week.
Maybe this will cause you to rethink your position..
To quote…””string of troubling inflation reports in recent days is likely to lead Federal Reserve officials to consider surprising markets with a larger-than-expected 0.75-percentage-point interest rate increase at their meeting this week.”
I took that into account before I made my prediction. I realize that the futures market has already priced in a seventy-five basis point hike. I don’t think the members of the FOMC will validate that, however. I wouldn’t be surprised if they radically revise the dot plot so that terminal rates converge with what the market expects in the medium term.
Well that didn’t take long…
30 Yr. Fixed 6.18% +0.33 YOY 2.78%
The thing about predictions is that you’ve always got a 50/50 chance of being wrong no matter how smart or informed you think you may be.
That’s not how probability works in relation to predictions and the possibility of an event or outcome.
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