Mortgage rates rise toward 5%
- Mortgage rates continue their upward climb in March, reaching a 40-month high of 4.9% by the end of the month. As yet, that has done little to cut home purchase demand. Indeed, applications saw a marginal increase last month. And so long as mortgage rates don’t rise above 6%, pent-up demand from the last couple of years will help prevent a large fall in purchase applications over the next year.
- On the back of a rise in the 10-year Treasury yield, the 30-year mortgage rate rose to 4.9% last week, the highest since the end of 2018. And with the 10-year yield having increased further since then it won’t be long before rates rise over the 5% mark. Admittedly, mortgage rates are also being driven higher by a widening spread between the 10-year Treasury yield and 30-year mortgage rate. (See Update.) That spread should drop back over the next few months and put some downward pressure on mortgage rates.
- But mortgage rates are not going to see a large fall, and that will act to moderate housing demand. Indeed, the rise in mortgage rates and soaring house prices have pushed mortgage payments as a share of median family income to over 20% for the first time since late 2007. (See Chart 1.)
- Despite that, mortgage applications for home purchase have so far held up. Indeed, applications rose 0.4% m/m in March. In part that is because some households are trying to buy now before rates rise further. But we think it also reflects plenty of pent-up demand from the last couple of years as record low inventory has frustrated many potential buyers. As long as mortgage rates don’t rise above 6%, we doubt home demand will crash. After all, the mortgage payment burden was around 20% for most of the period from 1995 to 2005. Rather we expect a modest fall in applications for home purchase over the next year to just under their pre-COVID level.
Chart 1: Mortgage Payments as Share Median Family Income (S. Adj., %)
Sources: Refinitiv, NAR, Capital Economics
Table 1: Mortgage Applications (Calendar Month Averages)
All Applications (% m/m)
For Home Purchase (% m/m)
For Refinancing (% m/m)
30-Year Mortgage Rate (%)
Matthew Pointon, Senior Property Economist, +1 646 934 6640, firstname.lastname@example.org