Mortgage Rates Inch Down as Bond Investors `Comforted' by Fed's Inflation View

The average U.S. rate for a 30-year fixed mortgage dipped below 3% this week, dropping from a two-month high, as mortgage investors bet that an inflation spike would be temporary.

The rate was 2.98%, down from 3.02% last week, Freddie Mac said in a report on Thursday. The average for a 15-year fixed home loan was 2.26%, down from 2.34%, the mortgage financier said.

Rates inched downward in a sign that mortgage investors agreed with the Federal Reserve’s stance that May’s spike of inflation would be temporary. Inflation surged 5%, the largest yearly increase since August 2008, measured against a year ago when most Americans were staying home to avoid spreading Covid-19.

“Inflation is the enemy of mortgage rates – when mortgage-bond investors are expecting higher inflation, home-loan rates go up, but we’re not seeing that,” said Mark Goldman, a loan officer with C2 Financial Corp. in San Diego, California. "The Fed seems to have comforted the market with its view that the inflation is transitory."

While mortgage rates are expected to inch upward in the second half of 2021, none of the major forecasters sees rates above 4% through the end of 2022. The average U.S. rate for a 30-year fixed mortgage probably will increase to 3.2% by the fourth quarter of 2021, from 3% in the current period, and rise to 3.4% by the end of 2022, Fannie Mae said in a June forecast.

That would put average rates lower than the 3.5% of 2020’s first quarter, the last reading before the onslaught of the pandemic prompted the Federal Reserve to begin purchasing massive amounts of mortgage bonds to keep credit markets from freezing up.

The Fed has continued purchasing $120 billion of bonds each month – including $80 billion of Treasuries, used as a benchmark for home-loan rates, and $40 billion of mortgage-backed securities. That increases competition in the bond markets and pushes down mortgage rates because investors have to take smaller yields for their investments.

The Fed said at the end of its two-day meeting in June that it would discuss tapering those purchases at its next meeting, scheduled for July 27 and 28 in Washington D.C. Fed Chairman Jerome Powell has promised the central bank would extricate itself from the markets in a way that would not create disruption.

“In the short-term, the average rate is bouncing around – just above and below the 3% level,” said Goldman. “But in the medium-term, in the next few months, everyone expects rates to inch up as the economy heats up.”