Last week's higher-than-expected inflation data caused a rapid escalation in mortgage rates.
According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average soared to 5.78% with an average 0.9 point. (A point is a fee paid to a lender equal to 1% of the loan amount. It is in addition to the interest rate.) It was 5.23% a week ago and 2.93% a year ago. The 55-basis-point increase is the biggest one-week jump since 1987. (A basis point is 0.01 percentage point.) The 30-year fixed average hasn't been this high since November 2008.
Freddie Mac, the federally chartered mortgage investor, aggregates rates from around 80 lenders across the country to come up with weekly national averages. The survey is based on home purchase mortgages. Rates for refinances may be different. It uses rates for high-quality borrowers with strong credit scores and large down payments. Because of the criteria, these rates are not available to every borrower.
The 15-year fixed-rate average climbed to 4.81% with an average 0.9 point. It was 4.38% a week ago and 2.24% a year ago. The five-year adjustable rate average rose to 4.33% with an average 0.3 point. It was 4.12% a week ago and 2.52% a year ago.
"The Freddie Mac fixed rate for a 30-year loan continued climbing this week in response to last week's inflation data and in anticipation of this week's increase in the target federal funds rate," said Hannah Jones, an economic data analyst at Realtor.com. "Although rates tracked by Freddie Mac remain in the fives, other mortgage surveys showed interest rates exceeding 6% early this week in response to inflation data which increased to 8.6% in May."
The Federal Reserve approved its largest interest rate increase since 1994 this week, raising its benchmark rate by 0.75 percentage point. The rate increase is the third this year by the Fed as it tries to tame inflation. At its May meeting, the central bank raised the federal funds rate by a half-percentage point. It took its first steps toward bringing down inflation in March when it raised its benchmark rate for the first time since 2018. Although the Fed does not set mortgage rates, its actions influence them.
"The annual inflation rate unexpectedly accelerated to 8.6% in May, and mortgage rates won't have much reason to fall as long as inflation remains elevated," said Holden Lewis, home and mortgage specialist at NerdWallet. "The Federal Reserve increased short-term rates by a hefty 0.75 [percentage point] to slow economic growth and get inflation under control."
Investors had largely anticipated the aggressive move, which is why long-term bond yields skyrocketed this week. The yield on the 10-year Treasury climbed to its highest level in more than a decade, reaching 3.49% on Tuesday before falling back to 3.33% after the Fed announcement. At the beginning of the year, the yield was 1.63%.
"The 30-year mortgage rate tends to follow the 10-year Treasury yield and the 10-year Treasury just hit its highest yield in 11 years," Steve Reich, chief operations officer at Finance of America Mortgage, wrote in an email. "The 10-year Treasury is rising because investors are anticipating rate increases in the future. As a result, we've also seen mortgage rates follow suit and tick up recently. In the short-term, mortgage rates will likely continue to follow a similar range and keep pace with the 10-year Treasury yield."
Lewis expects mortgage rates to be less volatile in the near future.
"Mortgage rates tend to go up and down in anticipation of Fed rate moves, which is a way of saying that the Fed increase was already baked into mortgage rates," he said. "In other words, mortgage rates are more likely to go up or down before Fed meetings than after Fed meetings. Over the next week or two, we probably won't see big movements in mortgage rates like we did last week."
The Fed signaled another 0.75 percentage point increase could be on the table next month as well, although Federal Reserve Chair Jerome H. Powell told reporters after the meeting he does not expect moves of this size to be common.
"Given the consumer-price inflation rose to a 40-year high last week, it's very possible that the Fed will take a more hawkish position towards inflation and increase rates at a faster pace than originally expected," Reich wrote. "While there is always the possibility rates may cool later in the year depending on where the Fed projects inflation will be, we can likely expect to see mortgage interest rates continue to rise over the course of the next few months."
Bankrate.com, which puts out a weekly mortgage rate trend index, found the experts it surveyed mixed on where they expect rates to head in the coming week. Forty percent said they will go down, 40% said they will stay the same, and 20% said they will go up.
Dick Lepre, a loan agent at CrossCountry Mortgage, anticipates rates falling.
"This past week's massive increase in Treasury yields and mortgage rates should lead to a week of modest respite," Lepre said.
But Greg McBride, chief financial analyst at Bankrate.com, predicts rates will hold steady.
"Will the aggressive Fed move be enough to tame the increase in bond yields and mortgage rates?" McBride said. "Unless and until inflation peaks, it will only prove temporary."
Meanwhile, rising rates continue to put a damper on mortgage applications. Even though total applications bounced back slightly last week compared with the previous week, which was adjusted for the Memorial Day holiday, volume is down more than 50% compared with a year ago.
The market composite index -- a measure of total loan application volume -- increased 6.6% from a week earlier, according to Mortgage Bankers Association data. The refinance index rose 4% from the previous week but was 76% lower than a year ago. The purchase index climbed 8%. The refinance share of mortgage activity accounted for 31.7% of applications, the second-lowest percentage since December 2000.
"Mortgage applications increased for the first time in five weeks, with purchase and refinance activity both posting solid gains even as mortgage rates climbed," Bob Broeksmit, MBA's president and chief executive, wrote in an email. "Despite last week's jump in purchase applications, high inflation, fast-rising mortgage rates, and higher home prices have cooled the housing market. MBA's new forecast anticipates that sales of new and existing homes will fall below 2021 levels."