Rate update: The factors pushing mortgage rates higher

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By G. Steven Bray

Rates have risen to their highest level in 4 years. The 30-year fixed rate is toying with 5% again. So, is the magic over for the housing market?

That may be a tad melodramatic. The truth is we have several factors putting upward pressure on rates right now, and market sentiment seems to line up with those factors. The truth also is even at 5% rates still are historically low. While higher rates definitely impact housing affordability, recent history shows a robust housing market can be compatible with still higher rates than today.

So, what are the chances we see lower rates again? First, let’s review the factors pushing rates up.

– The government is borrowing more, and it finances that borrowing by selling bonds. Basic economics say more supply usually leads to lower prices, which for bonds means higher rates.

– The Federal Reserve is buying fewer bonds. Again, it’s basic economics. Less demand tends to result in higher rates.

– The Fed is hiking rates. While the Fed only directly affects short-term interest rates, its actions often put pressure on longer term rates.

– Finally, economic growth remains robust. While inflation still appears to be contained, history says economic growth can lead to inflation, which pushes rates higher.

It’s interesting the effect higher rates have had on what I’ll call market psyche. Most talking heads have been bemoaning the 10y Treasury bond rate breaching 3% again. I’ve seen several articles predicting doom and gloom ahead. The scary thing about this is that such talk, if it becomes prevelant, can become a self-fulfilling prophecy. I don’t see that yet. Consumer and business sentiment remains very high, but it will be important to watch that data going forward.

So, in the short term, I don’t see any reason to expect lower rates absent some extraordinary event that none of us wants. The course of rates later in the year likely will depend on how markets react to today’s elevated rates.