Increase in Mortgage Rates Despite Declining Inflation

As we navigate through the sweltering summer days, the elusiveness of relief from soaring mortgage rates is apparent.

The 30-year fixed-rate mortgage has surged to its highest level in nearly a year, just below 7%. In the latest weekly survey conducted by Freddie Mac, the average rate stands at 6.96%, marking the third consecutive week of escalating rates compared to last week’s average of 6.81%.

Bright MLS Chief Economist Lisa Sturtevant attributes the upward pressure on mortgage rates to the economy’s continued robust performance and the Federal Reserve’s commitment to raising interest rates.

Despite the elevated rates, potential homebuyers in today’s low-inventory market remain undeterred as their primary focus lies in finding a suitable home and securing an accepted offer. However, those who have been holding out for lower rates may need to exercise patience.

Sturtevant commented, “It is possible for rates to surpass 7% again. However, it is unlikely that this alone will lead to widespread home price drops.”

While mortgage rates have risen, inflation has significantly decreased. According to the latest Consumer Price Index, released on July 12, annual inflation in June reached its lowest reading in over two years at 3%.

Lawrence Yun, the chief economist at NAR, responded positively to the declining CPI figures, stating that low inflation could result in low mortgage rates and potentially stimulate more home sales and new home construction.

Despite these favorable developments, the housing portion of the index, which accounted for over 70% of the CPI increase, remains persistently high at 7.8%.

“Housing should not be treated similarly to other goods and services in the CPI basket,” argued Sturtevant. She highlighted the need for increased housing supply as the key factor in reducing housing costs, rather than further rate hikes from the Fed. Sturtevant warned that escalating rates without a strategy for increasing market supply would not cause housing costs to fall, unless the Fed takes the economy too far into a recession, subsequently impeding demand through job and income losses.

Yun agreed that rate hikes are no longer a viable solution. He emphasized the importance of the Fed looking ahead and focusing on early indicators such as future inflation and commercial leasing activity rather than solely relying on lagging economic indicators like jobs. Yun believes the Fed should pause its efforts to raise interest rates.

According to the weekly survey from the Mortgage Bankers Association, there was a slight increase, just under 1%, in mortgage applications compared to the previous week. This can largely be attributed to the rise in FHA and VA loans. However, purchase applications have declined by 26% year-over-year, while refinance applications have dropped by 39% since this time last year.

Joel Kan, the MBA VP and Deputy Chief Economist, highlighted the mixed signals in the economy, leading to higher Treasury yields, as the expectation of a rate hike from the Federal Reserve looms later this month. As a result, all mortgage rates in our survey also increased, with the 30-year fixed rate reaching 7.07%, the highest level since November 2022.

Mortgage Daily News has reported rates exceeding 7% for nearly two weeks, with July 12 marking the first day of sub-7% rates this month.