Since the start of the year, mortgage rates have raced from the 3 percent range and past 4 percent to more than 5 percent, reaching that benchmark months or even years ahead of schedule, depending on which forecaster you ask.

The average rate for a conforming 30-year fixed rate mortgage hit 5.05 percent Wednesday, according to lock data from Optimal Blue.

Mortgage rates race toward 5 percent

The new rates represent a relatively sudden departure from the remarkably low rates of the last two years, when the Federal Reserve was scooping up mortgage-backed securities and holding interest rates low in an effort to stimulate an economy hobbled by the effects of a deadly viral outbreak. 

But while a return to higher rates was expected eventually, the speed at which they returned to the 5 percent range surprised forecasters and rattled homebuyers, mortgage industry professionals told Inman.

“It caught everyone’s attention,” Houwzer’s Bob Griffith said of the upswing in mortgage rates. “I think it [slowed] the homebuyer market for about a week. It felt like people were looking at this thing and trying to figure out where rates were going to settle in.”

Griffith, Houwzer’s general manager of home services, said customers have quickly adjusted to the new landscape, and have yet to be deterred from seeking their next home on the market. After all, 5 percent remains a low rate from a historical perspective, he said.

But a return to a 5 percent rate environment represents new territory for a pandemic-era market where home prices are already higher than ever — and continuing to rise.

As recently as late March, the Mortgage Bankers Association forecasted mortgage rates would end the year around 4.5 percent and remain in that range through 2024.

Joel Kan, an MBA economist, told Inman the trade group is likely to adjust its next long-term rate forecast upward in light of recent events. 

But the fact the most recent forecast for long-term mortgage rates was surpassed before the group could even release its next monthly report speaks to the highly volatile nature of the markets right now, and the difficulty of predicting future rates in general, he said.

“[There’s] lots of uncertainty, I think, when it comes to what markets think the Fed might do,” Kan said. “There’s a lot of ‘mights’ and ‘maybes.’ The uncertainty seems to be what’s driving a lot of it.”

While the next long-term rate forecast will likely be higher than the last, Kan said, the same uncertainty that’s sped markets to reach 5 percent territory in a few short weeks could also drive rates back down again at a moment’s notice.

Markets are closely watching the Federal Reserve as it determines how quickly to sell off assets on its balance sheet in an effort to blunt a rise in consumer prices. These assets include U.S. bonds and mortgage-backed securities.

An unexpected shock to the global economy — perhaps one related to Russia’s invasion of Ukraine or another geopolitical event — could create more volatility in the mortgage market, Kan said.

The last time rates were at 5 percent, home prices were much lower than they are today. The combination of rising rates and booming home-price growth has led to a sharp increase in monthly mortgage payments in a short amount of time, Kan said.

Homebuyers applied for a median mortgage payment of $1,653 in February, up from 1,383 as recently as December, when prices were lower and rates were closer to 3 percent, according to a recent MBA report.

Despite rising rates, the lack of available homes for sale at any given time is expected to continue driving prices higher for the foreseeable future, Robert Heck, vice president of mortgage at Morty, wrote to Inman in an email.

“The continued limited supply in the market is currently driving demand and outweighs any impact on affordability so far,” Heck wrote. “Inventory is worth tracking just as closely, if not more so than rates to understand the state of the market.”

So far, buyers have been able to take the higher rates and rising home prices mostly in stride. Wages have been growing healthily throughout much of the country, and buyers remain qualified to take out loans.

In other words, high demand for a limited supply of houses is likely to persist, even if price growth does eventually begin to slow from its breakneck pace, Griffith said.

And while rising rates may have spooked some buyers momentarily, Griffith’s 30 years in the mortgage industry have convinced him that consumers will ultimately adjust to any number of short-term changes to mortgage rates.

“I think over time — and I’ve experienced this before — we’ll lose connection with that crazy 3 percent interest rate environment we were at,” Griffith said. “It’s just going to recede into our memories. And we’ll just acclimate to the current environment, which is still very, very favorable.”

Email Daniel Houston

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