Home Prices Set Another Record As Mortage Rates Fall

Mortgage rates are falling as markets deal with the fallout from Russia’s invasion on Ukraine, implying that home prices will continue to rise.

According to Mortgage News Daily, the average rate on the popular 30-year fixed mortgage has grown nearly a full percentage point from the start of the year until last Friday, when it touched 4.18 percent. On Monday, it dropped to 4.04 percent, and on Tuesday, it dropped to 3.9 percent. This is the greatest two-day drop since the outbreak began in March 2020.

As the traditionally busy spring season begins, this will give homeowners additional purchasing power. It will also ensure that record-high property values continue to rise. According to a survey released Tuesday by CoreLogic, prices were 19.1 percent higher in January than the previous year. That rate of increase is the greatest in the 45 years since CoreLogic began keeping track of prices.

“In December and January, for-sale inventory continued to be the lowest we have seen in a generation,” said Frank Nothaft, Chief Economist at CoreLogic. “Buyers have continued to bid prices up for the limited supply on the market.”

Nothaft went on to say that the rise in mortgage rates since January has reduced buyer affordability, and that price growth would likely decelerate in the following months, depending on how long the rate decline lasts. It may be brief, given the other reasons impacting the mortgage market that are unconnected to the Ukraine issue.

Mortgage rates are influenced by the US 10-year Treasury yield, which plummeted to its lowest level since late January on Tuesday. Markets have been volatile as a result of Russia’s invasion of Ukraine.

For the time being, the shift in Treasurys is prompting mortgage rates to fall. Mortgage rates, on the other hand, are more directly influenced by demand for mortgage-backed securities. Those bonds frequently resemble the 10-year, but not always, and this is one of those situations.

Unlike Treasurys, the length of MBSs can fluctuate based on refinancing demand. A 30-year fixed loan is quite rare to last that long. If consumers refinance or sell their homes more quickly, the bond term will be shorter. According to Matthew Graham, Chief Operating Officer of Mortgage News Daily, the current crop of MBS isn’t likely to endure much longer than five years because of rising rates and greater opportunities for refinancing.

5-year Treasurys have increased 0.10 percent more than 10-year Treasurys in the last three months. Mortgage bonds have had a harder time keeping up with the 10-year Treasury note because they behave more like the shorter-duration 5-year Treasury note.

“The outlook for Fed bond buying is also hurting MBS more than Treasuries because the Fed accounts for a larger percentage of total buying demand of new MBS,” Graham said. “So if the Fed leaves (which it is in the process of doing), MBS prices have to fall farther to attract buyers. Lower MBS prices = higher rates, all other things being equal.”

Given current global tensions, however, demand for short-term debt has increased, and mortgage rates are now more closely aligned with the larger bond market. The question is how long this will continue to be the case, and the answer is contingent on what occurs in Ukraine and elsewhere.

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