- U.S. mortgage rates are continuing their rapid rise and reaching levels not seen since well before the pandemic.
- Rising mortgage rates could eventually affect consumption though and while defaults are still low, if wages don’t increase to keep up with the costs of living, could set off a recession.
The thing about raising interest rates to combat inflation is that to begin with, monetary policy is a blunt tool to combat inflation – there’s no clear evidence that it works, but the other side effect is that it can put pressure on the economy in other ways as well.
And that pressure is starting to show up on the mortgage market, with U.S. mortgage rates continuing their rapid rise and reaching levels not seen since well before the pandemic.
The average 30-year loan servicing cost was 4.42%, up from 4.16% since last week and the highest since January 2019, according to a statement by Freddie Mac, a government-sponsored mortgage company.
Borrowing costs tracked another increase in benchmark U.S. 10-year Treasury yields which influence everything from mortgages to auto loans and in the wake of a U.S. Federal Reserve rate hike last week that lifted benchmark interest rates by 0.25%.
With the pace of inflation at its highest in 40 years, policymakers have communicated that they are willing to take more aggressive measures to reign in price pressures.
But it’s not clear if their policy moves will do much to help given that most of the current increases are due to roiled supply chains and Russia’s invasion of Ukraine which has made matters worse.
Rising mortgage rates could eventually affect consumption though and while defaults are still low, if wages don’t increase to keep up with the costs of living, could set off a recession.
Higher interest rates have also seen companies become less aggressive in their hiring and expansion plans and fundraising in the U.S. capital markets this year has been lackluster.
Demand for housing remains strong nonetheless, and that should help to pick up some of the slack should weaker buyers be unable to service higher mortgage rates, but investors will want to pay attention to this end of the market for weakness, especially as the Fed starts to runoff its balance sheet which includes mortgage-backed securities.