Potential homebuyers largely stepped back from applying for mortgages last week as worries around interest rates helped fuel an increase in the cost of home loans to a three-month high.
The average contract interest rate for a 30-year fixed-rate mortgage shot up 23 basis points to 6.62% for houses sold for $726,200 or less in the week that ended February 17. The Mortgage Bankers Association said in its survey that rate was 6.39% a week earlier. The cost associated with purchasing a home has scaled up alongside a surge in US bond yields. Investors have been pricing in expectations the Fed will keep interest rates higher for longer than anticipated as inflation is showing signs of reaccelerating. As well, they are considering that the Fed may jack up its benchmark rate even more than they expected. The Fed funds rate stands at 4,5% to 4.75%.
"This time of the year is typically when purchase activity ramps up, but over the past two weeks, rates have increased significantly as financial markets digest data on inflation cooling at a slower pace than expected," Joel Kan, deputy chief economist at the MBA, in Wednesday's release. He said that many homebuyers are"back on the sidelines" with the rise in mortgage rates, especially cost-sensitive first-time homebuyers. Fed funds futures pricing suggests investors expect policymakers to raise the benchmark rate to as much as 5.3%, up from a previous projection of 5.1%.
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