Mortgage Rates Rise as Bond Investors React to Inflation Spike

Mortgage rates rose this week as bond investors reacted to economic reports including one that showed U.S. inflation in October reached a 31-year high.

The average U.S. rate for a 30-year fixed mortgage increased to 3.1%, the second-highest level in seven months, from 2.98% last week, Freddie Mac said in a report on Thursday. The average 15-year fixed rate rose to 2.39% from 2.27%, the mortgage securitizer said.

Rates for home loans rose after a government report last week showed inflation spiked to 6.2% last month as supply-chain bottlenecks caused by the pandemic fueled price increases. The biggest spike was in energy prices – up 30% from a year ago, the report said.

“The combination of rising inflation and consumer spending is driving mortgage rates higher,” said Sam Khater, Freddie Mac’s chief economist.

In addition to higher rates, people shopping for homes are grappling with a shortage of inventory that pre-dates the pandemic, Khater said.

“Shoppers looking to buy a home are fueling strong demand while ongoing inventory shortages are not improving in the presence of higher home prices," he said. "This reality illustrates the challenging situation facing the housing market.”

The bond investors that drive mortgage rates by the returns they are willing to take for their long-term investments are demanding higher yields to compensate for inflation.

Yields on the 10-year Treasury, which acts as a benchmark for home-loan rates, rose to a three-week high on Wednesday.

While mortgage rates are expected to continue rising, they are not expected to spike. The average U.S. rate for a 30-year fixed home loan probably will be 3.5% in 2022, increasing from 3% this year, according to a forecast by Freddie Mac economists.