Where are mortgage rates headed after a rocky week for the economy?
US crude oil prices jumped above $90 per barrel on Friday as the US war on Iran continued while bond yields ticked slightly lower on the back of an underwhelming jobs report.
Ten-year Treasury yields, which heavily impact the 30-year fixed average mortgage rate, slipped to around 4.13% at the time of writing as a rise in unemployment and lower-than-expected job creation in February fueled speculation of possible Federal Reserve interest rate cuts.
But the bad news for mortgage market watchers is that those yields remain higher than they sat at the beginning of the week, when they lingered around the 3.93% mark.
While mortgage rates dipped into the fives in recent weeks, that proved a short-lived trend as the average 30-year rate inched up to 6.00% for the week ending March 5, according to Freddie Mac, partly because of the increase in bond yields.
Rates are still significantly lower than the same time last year, when the 30-year fixed rate averaged 6.63%. But economists don’t see much chance that they’ll slide in the months ahead, even though a weakening economy might normally be viewed as a harbinger of Fed rate cuts.
Mortgage Bankers Association (MBA) senior vice president and chief economist Mike Fratantoni signaled that he didn’t see lower rates on the horizon anytime soon.
“The job market is softening and inflation is expected to increase due to a spike in oil prices resulting from the war in Iran,” he wrote after the latest employment data release.
“Although this month’s job numbers were weaker than expected, we do not expect the FOMC [Federal Open Market Committee] to cut rates anytime soon given the heightened inflation risk.”
Rates expected to harden amid headwinds
The MBA’s forecast for rates in the 6% to 6.5% range is remaining unchanged after the new jobs figures, he said. “A softer job market will be a headwind for housing demand as we enter the spring homebuying season.”
And TD Bank director and senior economist Thomas Feltmate also said he doesn’t expect lower rates in the months ahead, particularly with the risk of an inflation flareup as a result of the Iran war.
“This morning’s release doesn’t fundamentally alter our view on the labor market,” he wrote. “From a policy perspective, the bigger threat to the Fed’s dual mandate has shifted back to price stability.
“Core measures of inflation remain stubbornly elevated with this week’s escalation of the Iran conflict adding further upside risk amid the spike in oil prices. Fed futures aren’t fully pricing in the next rate cut until September and there are doubts about whether there will be a second this year.”
Mortgage brokers, meanwhile, aren’t exactly confident Treasury yields – or the Fed funds rate – will be on the way down as spring buying season looms into view.
“What people don’t realize is war is inflationary,” California-based broker Amir Nurani told MPA earlier this week. “Because you have spikes in oil prices. The other part of that is when we go into war, the likelihood of the Fed needing to print money goes through the roof.
“Do I think this is going to lead to a Fed rate cut? I don’t think so. I think that the money printer will turn on before the Fed starts easing on rates.”
Glen Weinberg of Fairview Commercial Lending also sees rates either holding steady or moving slightly higher amid the current volatility.
Still, that prediction comes with two caveats. “First, if the Iran war resolves quickly, it could put some downward pressure on rates – but that’s a wildcard,” he told MPA. “On the other hand, if jobs weaken substantially more, that would put additional pressure on the Fed.
“Unfortunately based on the data, we could be entering a period of stagflation – rising inflation with a softening economy – which would be a huge problem for the Federal Reserve to resolve, especially in the age of huge deficit spending which is putting upward pressure on rates.”
Market outlook remains calm – for now – despite war outbreak
Financial markets trembled towards the end of this week at the prospect of a lengthy and punishing conflict in the Middle East, particularly after President Trump said Thursday that the war could only end with Iran’s “unconditional surrender.”
For now, though, experts say it’s too early to panic about whether the conflict will have a lasting negative effect on the economy. “The impact on US GDP and inflation should be modest, assuming a limited military campaign,” said John Canavan, lead US analyst at Oxford Economics, “possibly allowing the Federal Reserve to look through the immediate volatility.”
But the latest indication of a sagging labor market could give some mortgage shoppers pause for thought even as the market looks ahead to spring buying season.
“February’s report suggests hiring remains cautious, which can weigh on housing turnover even when affordability is improving,” Zillow senior economist Orphe Divounguy said.
“If softer growth helps mortgage rates ease, that supports affordability – but households still need strong income growth and confidence in job security to list, buy, or move.”
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