Mortgage Rates, Done With the Pandemic, Rise to 2019 Levels on Fed Exit

The U.S. hasn’t yet emerged from the Covid-19 pandemic, with deaths still exceeding more than 2,000 a day, but mortgage rates have returned to a level last seen seven months before the discovery of the novel coronavirus.

The average U.S. rate for a 30-year fixed mortgage rose to 3.92% this week, the highest since May 2019, after jumping nearly a quarter of a percentage point from last week’s 3.69%, Freddie Mac said in a report on Thursday. The average rate for a 15-year home loan is 3.15%, the highest since 2020’s first week.

Rates are rising as the bond markets lose their biggest buyer – the Federal Reserve, which had been purchasing $120 billion of Treasuries and mortgage-backed securities a month to keep credit flowing during the pandemic. The Fed has been winding down its purchases since early November and said it plans to end the program in early March.

“The Fed stepping away from the marketplace is making things worse for homebuyers,” said Keith Gumbinger, a vice president at HSH.com, a mortgage research firm. “When you add the Fed taper to all the other factors, like a strong economy, rising wages, and inflation, you get higher mortgage rates.”

Rates are rising faster than predicted by any major housing forecaster. Including the data from this week’s report, the average since the beginning of the year is 3.56%, based on the Freddie Mac data. That’s higher than the prediction of a 3.4% first-quarter average from the National Association of Realtors and the 3.5% forecasted by Fannie Mae.

U.S. home-loan rates are set by the returns the investors in mortgage-backed securities are willing to accept for their investments. When demand drops, yields tend to rise, pushing mortgage rates up, said Gumbinger.

“It’s basic supply and demand,” Gumbinger said. “If there’s lots of demand for bonds, that can drive yields down. When demand drops, in order to attract investors to spend their hard-earned dollars, bond yields have to rise, which pushes mortgage rates up.”

The Fed’s entry into the mortgage market in March 2020, as the pandemic first started hitting the U.S. economy, drove rates below 3% for the first time ever four months later.

After hitting more than a dozen new lows during 2020, the rate reached the lowest ever recorded in the Freddie Mac series that goes back to 1971: 2.65% in 2021’s first week.