Hot Housing Market Faces Mortgage Rate Chill

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Residential real estate sales are still hot, but a recent uptick in mortgage rates—they’re now averaging over 3% by one measure—is starting to put a little chill on the housing market

While still near historic lows, rates on 30-year fixed mortgages have risen for the past three weeks, climbing to an average of 3.08% from 2.92%—contributing to decreases in both new mortgage applications and refinancing activity, the Mortgage Bankers Association (MBA) said Wednesday. The MBA’s purchase index, a leading indicator of home sales and construction, has fallen 21% in the same three-week period, while the refinance index has declined 19%.

Low borrowing costs, plus increased demand for more space during the COVID-19 pandemic, have been the bedrock for a soaring housing market, surging sale prices and all. But mortgage rates, influenced by inflation-sensitive 10-year Treasury yields, are now at an almost six-month high, thanks to renewed optimism about the economy and anticipation of an uptick in consumer prices.

“Refinance and purchase applications remain above year-ago and pre-pandemic levels, rates are still low, and the pandemic still makes low-density housing preferable to many,” said Ross Cioffi, an associate economist for Moody’s Analytics, in an online commentary. “We expect demand for new mortgages to continue in 2021, though it will slow considerably from last year’s frenzy.”

To be sure, the housing market is still going strong, with January sales of existing homes still well above pre-pandemic levels, even with a severely depleted inventory of properties for sale. Sales of new homes rose 4.3% in January—well above the 1.5% expectation of economists cited by Moody’s, Census Bureau data released Wednesday showed.

Severe winter weather in Texas also affected last week’s indexes, MBA said, causing more than a 40% drop in both purchase and refinance applications in that state.