Interest Rates Resume Rapid Rise

After a steep decline in mortgage interest rates from November through the end of January, rates have quickly returned to the up-side in February with the 10-year treasury yield rising over 50 basis points during that time. Following this rise in treasury yields, the average 30-year fixed conforming loan rate has increased approximately 3/8 of 1% over the past three weeks.

The reason for this is fairly simple. Despite the FED taking massive steps to curb inflation in the form of hikes to short term rates, recent data shows that inflation has not decreased fast enough. The most recent CPI print showed a monthly increase of .5% month over month in January and 6.4% year over year. This was a larger increase over the past several monthly CPI increases, which the market had been taking as a sign that inflation was well on the way to being under control and the FED would soon stop hiking rates and possibly reverse course. Additionally, the producer price index, which is a measure of the cost of raw goods used by producers, increased .7% monthly compared to the projected .4%. Based on these higher than expected inflation readings, the market now predicts a higher terminal interest rate and rates staying higher for longer, increasing the return lenders and bondholders will require to lend money for longer duration loans, and thus increasing longer term treasury yields, which mortgage rates follow.

Other metrics have also led the economy to believe that the fight to curb inflation is far from done. January job growth was far above expectations at 517,000 new jobs for the month. Never mind that the majority of these jobs were restaurant, hospitality, and government jobs that pay much less than jobs that were lost during the same time at many large tech and financial services companies. Additionally, retail sales for January rose by 3.0% month over month compared to the 1.7% expected. All of these factors have led the market to believe that the economy remains strong and there is little chance of a FED pivot later this year.

This is bad news for real estate sales, at least in the short term, and could put the brakes on the increase in activity seen so far in 2023. We’re currently in a very interest rate-sensitive environment with demand increasing as rates declined in December. Despite a typical seasonal slowdown over the holidays, pending home sales were up 2.5% from November to December as rates significantly declined. Pending sales for January have not yet been released, but it is expected that they will have increased, as mortgage applications did, due to lower rates and a noticeable increase in activity. It is unclear whether that momentum can continue now that rates have ticked up again. This more than likely will result in less demand and less supply in the short term. Fortunately, new data is less than a month away and come out prior to the next FED meeting. If February numbers show more moderate sales and job growth as well as reduced inflation, treasury rates are likely to drop back down, as will mortgage interest rates.