A For Sale sign is displayed in front of a house in Washington, DC, on March 14, 2022.
Here's where mortgage rates and home prices may be headed in 2023
01:41 - Source: CNN Business
Washington CNN  — 

Mortgage rates shot up for the third-straight week, as inflation concerns make rates more volatile.

The 30-year fixed-rate mortgage averaged 6.5% in the week ending February 23, up from 6.32% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 3.89%.

Rates had been trending downward after hitting 7.08% in November, but are now climbing again, up about half a percentage point in a month. A slew of robust economic data suggests the Federal Reserve is not done in its battle to cool the US economy and will likely continue hiking its benchmark lending rate.

“The economy continues to show strength, and interest rates are repricing to account for the stronger than expected growth, tight labor market and the threat of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less than ideal credit will pay more than the average rate.

Inflation concerns remain

The mortgage rate for a 30-year, fixed-rate loan continued to climb as the 10-year Treasury yield has surged. The 10-year yield this week reached its highest level since November.

The Fed does not set the interest rates that borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

“On an ordinary day, strong retail sales data and a 53-year low unemployment rate would be a cause for celebration among investors and businesses,” said Jiayi Xu, an economist at Realtor.com. “However, under current conditions, these robust data raise uncertainties in the markets.”

On one hand, she said, the hotter-than-expected inflation might force the Fed to revisit faster interest rate growth, which is unwelcome news for both investors and businesses.

“On the other hand, some policymakers did not interpret January’s data as signs of accelerating growth, choosing to wait for more information before deciding,” she said. “As a result they are in favor of implementing smaller rate hikes in the coming months, which would be welcomed by markets.”

Housing market will be ‘nobody’s’

With rates moving back up and turning off buyers as the spring home buying season gets underway with hopeful sellers entering the market, the housing market will continue to be ‘nobody’s market’ said Xu – not friendly to buyers nor to sellers.

“Mortgage rates are likely to move in the 6% to 7% range over the next few weeks, which continues to pose a significant challenge to affordability,” she said.

Existing-home sales have retreated for the 12th straight month, though at a slower pace. In addition, the West is the only region where home prices decreased year-over-year, suggesting reduced demand for housing.

“This decline may be due to a combination of multiple factors such as high housing prices, high mortgage rates, and the recent wave of tech layoffs on the West Coast,” said Xu. “With more companies announcing their return-to-office mandates last week, some remote workers may choose to relocate back to major cities or tech hubs. As home prices are still high and mortgage rates are up compared to one year ago, people who move back may prefer to stay in the rental market, driving up the already high rental demand in these areas.”

Khater said that Freddie Mac’s research suggests that there is a wider range of rates borrowers lock in as average rates go up. All borrowers can benefit from shopping around for rates from different kinds of lenders including traditional banks, online lenders or credit unions.

“Homebuyers can potentially save $600 to $1,200 annually by taking the time to shop among lenders to find a better rate,” said Khater.