Mortgage rates retreat after three straight weeks of upward moves

Mortgage rates fell during the week after trending upward for most of October, but the Federal Reserve’s tapering announcement has the industry planning for future increases.

The 30-year fixed-rate mortgage average dropped five basis points to 3.09% for the seven-day period ending Nov. 4 after jumping to a six-month high one week earlier, according to Freddie Mac’s Primary Mortgage Market Survey. The week’s average came in above the level from the same week one year ago when it stood at 2.78%.

“While mortgage rates fell after several weeks on the rise, we expect future upticks due to stronger economic data and as the Federal Reserve pulls back on its stimulus,” said Sam Khater, Freddie Mac’s chief economist.

Other mortgage rates also declined on a weekly basis, according to the Freddie Mac survey. The 15-year FRM average dropped two basis points to 2.35% from 2.37% seven days earlier, but it was in the same ballpark as its level for the same week last year — 2.32%. The 5-year Treasury-indexed adjustable-rate mortgage dipped by two basis points as well, coming in at 2.54%, compared to 2.56% the previous week. In the same period in 2020, the 5/1 ARM averaged 2.89%.

Ongoing supply chain issues and slower consumer spending applied pressure on interest rates in the past week, according to Paul Thomas, Zillow’s vice president of capital markets. “With inflation indicators largely meeting expectations last week, rates got some relief as markets recalibrated interest-rate expectations during the week,” he said in a blog post.

But the Fed’s announcement has investors and economists expecting rates to rise sooner rather than later. On Tuesday, Fed Chair Jay Powell indicated that the central bank would begin drawing down its asset purchases in November by $15 billion a month — pulling back from Treasuries by $10 billion and from mortgage-backed securities by $5 billion. The Fed introduced its asset-purchase plan in March 2020 to support the U.S. economy from the distress caused by the onset of COVID-19. The announcement was widely expected in the industry after several months of hints, with the Fed determining that the economy had made substantial progress since last December.

“As the Fed’s actions were anticipated, this announcement will not impact our latest forecast for mortgage rates and mortgage originations,” said Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, adding that the association expected rates to rise to about 4% by the end of 2022.

However, the Fed also said it would not raise its federal-funds rate until the labor market reached maximum employment and the inflation rate appeared set to remain above 2% for a prolonged period. Powell has maintained that the current record spike in inflation is transitory.

Those upcoming increases in mortgage rates might only have limited impact on the hot housing market, according to Odeta Kushi, deputy chief economist at First American. “Context matters,” she said in a press statement. “The Fed tapering likely will prompt mortgage rates to rise, but it does not mean that the housing market will crash, although we may see some cooling of purchase demand, and definitely a cooling of refinance demand.”

Kushi noted that the decline in purchases after the 2008 housing crisis was a dramatic outlier, as existing-home sales actually increased in other periods following rate rises — 1996, 1998-2000 and 2013.

And a near-term rise in interest rates will not necessarily drive home prices down either, due to increased costs caused by supply-chain disruptions and persistent inventory shortages.

“House prices are more resistant to rising mortgage rates primarily because home sellers would rather withdraw from the market than sell at lower prices – a phenomenon we refer to as ‘downside sticky,’” Kushi added.