Mortgage rates hit highest since spring 2020

Ultralow interest rates have been a major driver in the housing boom over the past two years. Households that keep their jobs and save money during the pandemic thanks to low borrowing costs to buy larger homes can work or study from home. Buying a second home and investor demand for rental properties also increased sharply.

With a lower-than-normal number of homes for sale, buyers competed in a bidding war, pushing prices to new highs. The median current home price rose 13.9% in November from a year earlier to $353,900, according to the National Association of Realtors. That month, the average sales price for new homes hit an all-time high.

Mortgage interest rate still low by historical standardsand with strong buyer demand, housing economists don’t predict an immediate or significant drop in home sales. Existing home sales up in November to the highest seasonally adjusted annual rate since January of last year, and 2021 is on track to be the strongest home sales since 2006.

But with the Federal Reserve raising short-term rates this year, mortgage rates are likely to come with them higher, making home affordability an even bigger challenge.

“Price is really the biggest risk to the market,” said Ivy Zelman, managing director of real estate research and consulting firm Zelman & Associates.

A 3.22% rate on a $300,000 loan will generate a monthly payment of about $1,300, according to

LendingTree Inc.,

an online loan information site. At 2.65%, where average mortgage rates stood a year ago, the monthly payment would be $1,209. (Both figures exclude taxes and insurance.)

If interest rates continue to rise, existing homeowners are likely to be reluctant to sell their current home and buy a new home if they have locked in low rates.

“I think the 4% mortgage rate is going to kill the housing market,” Ms. Zelman said. “A lot of people are locked up below that rate, and that’s really what matters.”

NAR forecasts 30-year fixed mortgage rates will hit 3.7% by the end of 2022, a borrowing rate that group economists believe remains low enough to keep the housing boom going. customary.

“Housing demand is expected to remain strong this year,” said Nadia Evangeliou, senior economist and director of forecasting at NAR. “While the housing market is likely to calm down, it will still perform better than it did before the pandemic.”

Rising interest rates could also escape the refinancing boom that has driven mortgage lenders since spring 2020. As interest rates rise, fewer homeowners are able to reduce their monthly payments by refinancing.

Mortgage rates in recent days have followed a steep climb in US Treasury yields, which set a floor for borrowing costs across the economy. The yield on the benchmark 10-year U.S. Treasury note closed at 1.733% on Thursday, according to Tradeweb, up from 1.496% last Friday.

Yields started to rise sharply on Monday, a sign that investors are placing fresh bets on Federal Reserve rate hikes, reflecting expectations that the U.S. economy will continue to expand and Officials will take action to lower inflation. Yields rose further on Wednesday, as minutes from the Fed’s December meeting showed officials eyeing a faster timetable for rate hikes this year.

Fed futures contracts showed on Thursday that investors think there is a 75% chance the Fed will raise rates at its March meeting. They suggest a close to 50% chance that the central bank will raise rates by at least four-quarters of a percentage point this year.

Treasury yields are likely to rise as they remain based on expectations the Fed won’t raise rates as high as officials have indicated they think, say analysts and portfolio managers. is likely to happen.

Many investors and analysts are skeptical that the Fed will likely raise interest rates very high. A report by Bank of America analysts last year concluded that, given the amount of debt already in the economy, the 10-year yield could stay below 2.5% and still lead to a similar total cost of debt. as in 2018, when yields exceeded 3%. .

While mortgage rates remain near record lows, the drop in refinancing is likely to hit non-bank mortgage lenders harder than their major banking counterparts. reports fourth-quarter earnings starting next week. Since the 2008 financial crisis, banks have left the mortgage business.

American record loan of 1.61 trillion dollars to buy a home in 2021, according to estimates by the Mortgage Bankers Association, up from $1.48 trillion in 2020.

Write letter for Nicole Friedman at nicole.friedman@wsj.com, Orla McCaffrey at orla.mccaffrey@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com