Sudden Decline In Mortgage Rates Likely Just A Pause In Upward Trend

Mortgage rates tumbled this week as war in Ukraine rattled markets — but the dip is likely to prove only temporary, housing economists say. That’s because other factors closer to home are likely to push rates up.

The Federal Reserve has signaled that a hike in interest rates is imminent at this month’s meeting. The Fed needs to respond to the highest levels of inflation since early in the Ronald Reagan era. What’s more, the job market is booming, and the economy has regained the ground it lost during the coronavirus recession.

For now, though, images of Russian tanks rolling toward Kyev are dominating the world’s attention. As a result, the average rate on 30-year mortgages dipped to 3.97 percent this week from 4.08 percent last week, according to Bankrate’s weekly survey of large lenders. Mortgage giant Freddie Mac found a similar decline — it said rates fell 13 basis points this week.

This week’s decline in rates is largely a reaction to the news from Eastern Europe. “You can thank President Putin for the drop in rates,” says Mitch Ohlbaum, a mortgage banker at Macoy Capital Markets in Los Angeles. “The global markets are watching the Russia-Ukraine conflict very closely.”

But as the shock of a shooting war fades, it’s likely that rates will resume their upward path, mortgage experts say.

“Geopolitical tensions caused U.S. Treasury yields to recede this week as investors moved to the safety of bonds, leading to a drop in mortgage rates,” Sam Khater, Freddie Mac’s chief economist, said Thursday in a statement. “While inflationary pressures remain, the cascading impacts of the war in Ukraine have created market uncertainty. Consequently, rates are expected to stay low in the short-term but will likely increase in the coming months.”

Why mortgage rates might resume their rise

The forces driving mortgage rates are notoriously complicated, but here are three factors likely to outweigh war in Eastern Europe:

  • The economy is back: The pandemic sent the U.S. economy into a deep recession, and unemployment soared. That brief crash is in the rear-view mirror. Employers added a robust 467,000 jobs in January, the U.S. Labor Department reports, and the unemployment rate fell to just 4 percent, a level that’s essentially full employment.
  • Inflation is running hot: The consumer price index jumped 7.5 percent in January, the highest annual rate of inflation since 1982, according to the Labor Department.
  • The Federal Reserve is all but sure to raise rates: The Fed has signaled that multiple hikes in interest rates are imminent, with the first likely in March. The central bank could boost rates as many as seven times this year, although that scenario seems unlikely. The Fed also is slowing the pace of its purchases of mortgage-backed securities, something that creates upward pressure on rates.

A fourth factor — the 10-year Treasury yield — has been a wildcard. This number is closely tied to 30-year mortgage rates, and the 10-year yield recently topped 2 percent for the first time since early 2019, before falling below that level in recent days.

Treasury yields have been volatile after the Russian invasion. Rates were 1.84 percent Thursday, then fell to 1.7 percent Friday morning.

Yields on federal debt reflect the overall economy. When the economy crashed in 2020, 10-year rates plunged below 1 percent. Now, they’re back.

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