Mortgage Rates Climb as U.S. Narrowly Avoids Default

The 30-year fixed mortgage rate increased for the fourth week in a row to 7.24%. The fixed and adjustable rates of mortgages are at their highest since January 2022 when we started collecting data. The 5/1 ARM reached a record high rate of 5.99%.

As of June 1, here are the current mortgage interest rates without discount points, unless otherwise stated:

VA Purchase Loans: 6.66% plus 0.05 points (up from the 6.43% of a week earlier).

"While mortgage bond investors are still concerned about the risks to the housing and economy, it is expected that a successful bill on the debt ceiling will bring down mortgage rates in the coming weeks."

  • George Ratiu, chief economist at Keeping Current Matters

The 30-year fixed rate mortgage has increased by more than a quarter point in the last month. It went from 6.92% at the start of May to 7.24% as of the beginning June. Mortgage rates have reached their highest level since November 2022 when they peaked at 7.33 percent.

The rise in rates is due to several factors. For example, investors reacted to the small possibility of a default by the government last week before Congress took steps to suspend the debt ceiling. This week, the House and Senate passed the debt ceiling agreement. The majority of Democrats as well as Republicans voted in favor. Now, the bill will be sent to Joe Biden for signature.

Investors will be happy to hear that the debt ceiling was passed, as it could lower mortgage rates from their current level. As we all know, it's not just the debt ceiling that is pushing up mortgage rates. The U.S. has been surprising resilient to the Federal Reserve rate hikes. Low unemployment and high inflation have accompanied these increases.

Fed officials will analyze economic data in the weeks ahead to make a decision on the rate for June. The Fed may decide to increase the federal funds rate if the economy continues to grow and inflation remains above the central banks' 2% target. The mortgage rates could rise or stay high, which would exacerbate the affordability crisis that is affecting both homebuyers as well as prospective sellers.

It's unlikely, however, that the Fed would cut rates in the month of June. The central bank's economic projections for the year showed the federal funds rate to be 5.1%, which means that the Fed does not expect any rate cuts by 2023.

Just because the Fed has said it will not cut rates in 2019, doesn't mean that it won't. Many forecasters believe that the economy will fall into a deep recession by the second half 2023. If this happens, the Fed may cut rates in order to stimulate economic activity. We'll need to wait for more data about inflation and employment before we can determine whether lower rates are imminent.

Indicator of The Week: Home prices continue to rise despite 7% rates

Selma HEP, CoreLogic's Chief Economist, says that the latest S&P CoreLogic Case Shiller Home Price Index shows a "counterintuitive strength" with relatively high home price growth. Despite mortgage rates being consistently above 7%, home prices rose 1.3% per month in March. Prices are also slightly higher than in March 2022 when mortgage rates were between 4% and 5%.

Hepp attributes the stubbornly high prices of homes this spring to a mismatch between supply and demand. Low housing inventory was a result of a strong return of buyers, and homeowners were reluctant to sell or sacrifice their record low mortgage rates. Zillow's data shows that the inventory of homes available for sale increased in April. However, supply is still well below levels before the pandemic.

Hepp says that many homebuyers have to bid above the asking price. This is driving up prices in early spring far beyond what has been seen traditionally during this time.

Ratiu says that buyer demand has returned in the spring as families are looking for more space and retirees want to find a cheaper location. Young professionals also want to get out of the cycle of rent hikes to build wealth. In many markets, sellers are experiencing a deja vu that is surprising: multiple offers and price escalation provisions.

You can't compare regional trends to national trends when comparing home prices. The Southeast is the strongest region in the country, with a 5.4% increase in home prices since March last year, while the West has the lowest home prices, with a 6.2% drop over the last year.

Monthly data suggests that the West Coast cities, which were disproportionately affected by the slowdown of the housing market in late 2022, may be on their way to recovery. San Francisco and San Diego experienced the largest price increases between February and march. All 20 of the largest U.S. housing market saw monthly price increases in March, compared to just 12 in Feb.

Ratiu says that the silver lining is that prices in many markets, such as Seattle, San Francisco and San Diego are lower today than a year ago. This reflects a correction of the overheated peak," he adds. Insufficient supply coupled with a resilient demand has led to a price increase as summer approaches.