Yields surged to near two-decade highs before pulling back sharply – but mortgage professionals shouldn't breathe a sigh of relief just yet
It’s been a turbulent year for the US bond market so far – and this has been one of its most chaotic weeks, with yields surging to their highest level in nearly two decades before diving again on Wednesday.
On Tuesday, the 30-year Treasury yield hit 5.2%, its highest level since 2007, amid growing fears about a prolonged inflation spike stemming from the US-Iran war. The yield on the 10-year Treasury, meanwhile, surged to a 16-month high of 4.7%.
But just as quickly, the pressure eased. The 10-year yield dipped on Wednesday as oil prices eased and better-than-expected UK inflation figures helped soothe global financial markets.
That rollercoaster has left mortgage market watchers and hopeful homebuyers in the dark about what’s in store for rates, which jumped to 6.56% last week (according to the Mortgage Bankers Association) but could be about to move lower thanks to the latest yield drop.
Freddie Mac’s latest mortgage rate update is due to be released around midday Thursday, likely giving the clearest indication yet of where things stand for the mortgage market after an eventful few days.
What’s behind this week’s yield volatility?
The catalyst for Tuesday’s spike was a combination of persistent inflation and geopolitical pressure. Wholesale inflation came in hotter than expected in April, with producer prices posting their biggest 12-month gain since December 2022.
That reading landed just a day after the Bureau of Labor Statistics reported consumer prices had jumped to a pace of 3.8% annually in April, the highest since May 2023, compounding concern that inflation has become entrenched rather than transitory.
The Iran war, meanwhile, has kept the Strait of Hormuz effectively closed to shipping traffic, driving oil prices higher and intensifying inflationary fears across the world. Financial markets have upped their expectations of Federal Reserve rate hikes in the months ahead as a result, another factor that’s put upward pressure on bond yields and mortgage rates.
How is the housing market faring amid continuing rate uncertainty?
Homebuyers seem to have shaken off some of their earlier trepidation about the Iran war and its possible impact on the US economy and housing market.
This week, the National Association of Realtors said pending home sales were 1.4% higher last month compared with March and up 3.2% on a year-over-year basis, increases described by National Association of Realtors (NAR) chief economist Dr Lawrence Yun as indicating “cautious optimism” among purchasers.
Still, the mortgage industry is under no illusions about the unpredictability of the current conflict and how it could negatively affect the purchase environment – especially with rates appearing to be on a steady march towards 7% at the beginning of the week.
Speaking with Mortgage Professional America last week, Fairview Commercial Lending’s Glen Weinberg said he doesn’t see much cause for sustained optimism on the housing front as economic uncertainty rumbles on.
“It is going to be a challenging year in the real estate industry as volumes remain at historic lows due to high rates – and possibly rates heading even higher,” he said. “From a mortgage perspective there will not only be fewer purchases, but also very few, if any, refinances.”
What’s next for home prices?
While a subdued pace of activity looks likely to persist through the US housing market between now and the end of the year, the prospect of big further price drops looks a distant one for now.
Yun, in fact, said affordability could worsen for new buyers because of a dearth of construction across the country, and highlighted that a majority of markets are still seeing little to no downward movement in prices compared with last year.
“Unless supply meaningfully increases, home price growth could outpace wage growth and further erode the homeownership rate,” he said.
And another factor could also keep price corrections in check: the so-called “lock-in” effect, which has kept many homeowners in their current properties because they secured an ultra-low mortgage during the COVID-19 pandemic when borrowing costs plummeted.
With rates remaining elevated, Weinberg said there are few incentives for plenty of existing homeowners to list their properties and move somewhere else at a higher mortgage rate.
“I think of myself,” he said. “I locked in a rate of 2.75% on a 30-year fixed years ago, and there is no way I’m selling anytime soon. This should provide a bit of a cushion on the downside risks in the market.”
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