Mortgage rates are rising again.What this means for home buyers

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A pedestrian walks past the home mortgage office of Wells Fargo Bank in San Francisco.

Justin Sullivan | Getty Images

If you’re on the market for a home and you haven’t locked in a mortgage rate, that home can get even more expensive.

The average interest rate on a popular 30-year mortgage hit 3.64% Monday morning, following last week’s sharp rise, according to Mortgage News Daily. It was 3.5% on Friday and 3.29% last Monday.

The real jump came in the middle of the week, when the Fed announced that it would be pulling mortgage-backed bonds off its balance sheet sooner than expected. Bond yields are also on the back of news that a coronavirus omicron variant could spike and then slow quickly, with much weaker symptoms than previous variants, and economic activity could rebound quickly. Mortgage rates roughly follow the yield on the 10-year Treasury note.

“Bonds sold off last week at the fastest pace in at least nine months, driven by a hawkish Fed and paradoxical omicron optimism,” wrote MND COO Matthew Graham. “Corporate bond issuance and looming U.S. Treasury issuance added to selling sentiment.”

The current rate hike will cost would-be home buyers dearly. For a median-priced home, currently around $350,000, a buyer with a 20 percent down payment will now be paying $125 more per month than it was three weeks ago. For those with a low-down payment loan, the monthly increase will be even greater.

Mortgage rates haven’t been this high since the pandemic began in early 2020. Rates then briefly spiked for about 3 weeks before continuing their pre-pandemic decline, hitting a dozen all-time lows by the start of winter. This coincides with a surge in housing demand due to the pandemic, leading to a rapid uptick in home buying.

In 2021, interest rates fluctuated slightly but remained relatively low, further driving demand and house prices. The only thing holding back buyers is chronic supply shortages.

Higher rates could bring some cold water to high home prices as buyers hit an affordability wall. However, much of what is currently supporting prices is strong investor demand for housing. Investors are less likely to use mortgages.

While demand for new-build homes is rising, inventories at big builders including DR Horton, Lennar and Toll Brothers are falling. They tend to react quickly to sharp interest rate movements in either direction. Builder analysts have been very bullish on the sector, citing strong fundamentals. However, they now appear to be reconsidering.

“Overall, we expect the group (especially builders) to be affected by interest rates and the looming Fed cycle, and we will be more cautious as we expect housing fundamentals to slow,” analysts at RBC said on Monday wrote in a note to investors.


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