Prospective homebuyers saw a setback this week with the average mortgage rate climbing to 6.53% — the highest in nine months.
The benchmark 30-year fixed rate mortgage rose to 6.53% from 6.51% last week, mortgage buyer Freddie Mac said Thursday. However, despite this, the average rate remains below 6.89%, where it was a year ago.
When mortgage rates rise, they can add hundreds of dollars a month in costs for borrowers, reducing their purchasing power.
Rates have risen since the war in Iran began, and disrupted the passage of tankers ferrying crude oil from the Persian Gulf to customers. This caused a rise in oil prices, which is a key driver of inflation.
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Mortgage rates are influenced by a number of different factors, including the Federal Reserve’s interest rate policy decisions to bond market investors’ expectations for the economy and inflation. They generally follow the trajectory of the 10-year Treasury yield, which lenders use as a guide to pricing home loans. Expectations of higher oil prices have pushed up long-term bond yields, causing mortgage rates to head higher.
Jeff Taylor, a board member for the Mortgage Bankers Association and founder of Mphasis Digital Risk, told CBS News that homeowners and buyers should “reasonably expect mortgage rates to remain in the mid-to-upper 6% range for the balance of the year, with potential for rates to move into the 7% range if the Iran conflict is protracted.”
“This conflict has caused inflation, which causes investors to sell mortgage bonds, which pushes rates higher,” he added.
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Brian Shahwan, vice president and mortgage banker at William Raveis Mortgage, said that rising inflation is usually “bad news” in the short term. “Higher inflation equals higher bond yields which in turn equal higher mortgage rates,” he added.
In addition to higher mortgage rates, home prices are also likely to rise due to the inflation. This is particularly the case with new builds that have to deal with higher material and transport prices. It can also make home insurance more expensive, as well as reduce the budgets that buyers have to work with overall.
“Higher inflation could eat into homebuying budgets,” Shahwan said. “As borrowing costs rise, buyers could qualify for smaller loans or have to stretch their budgets further to cover interest, taxes, insurance, and other housing expenses that also tend to climb during inflationary periods.”