Let’s be real, there are a lot of negative headlines in the mortgage industry right now. Not the least of which are rapidly rising interest rates that have eclipsed 4% for many buyers. The latest Freddie Mac 30-year fixed-rate mortgage average came in at 3.92%. The good news is that means borrowers are still able to get a rate below that number depending on their qualifications. The part that is not so great is that rates will likely continue to rise as the economy normalizes.

Freddie Mac’s economists note, “ The 30-year fixed-rate mortgage is nearing four percent, reaching highs we have not seen since May 2019. As rates and house prices rise, affordability has become a substantial hurdle for potential homebuyers, especially as inflation threatens to place a strain on consumer budgets.”

Inflation numbers are also moving up at a very fast pace with the latest producer price index (PPI) coming in at 9.7% year-over-year. The data from the Labor Department shows the rising cost for wholesale items. The January reading nearly hit a record high not seen since 2010.

This same rising cost of goods and services has greatly impacted homebuilders who are trying to keep up with the demand for homes. The Census Bureau’s latest report shows housing permits came in at 1.89 million. The flip side is that housing completions were reported to only be 1.246 million-quite simply meaning while there is a clear need and drive to build, getting homes completed and sold is lagging far behind and further compounding the issues of inventory and high prices.

A silver lining is that current homeowners continue to see a strong rise in their home equity through rising home prices. While rising interest rates have greatly subdued the rate-term refinance surge, cash-out refinances are still a strong opportunity for many homeowners who might like to pull out some built-up equity to make some home improvements.

Keep in mind that purchase demand isn’t waning much despite the increased rates. The Mortgage Bankers Association’s weekly survey showed that purchase applications were only down 7% year-over-year as we are heading into the traditionally strong spring buying season.

The MBA’s Associate Vice President of Economic and Industry Forecasting Joel Kan said in their release, “Purchase applications saw a modest decline over the week, with government purchase applications accounting for most of the decrease. Prospective buyers still face elevated sales prices in addition to higher mortgage rates. The heavier mix of conventional applications again contributed to another record average loan size at $453,000.”   

Kan also reiterated what we’ve discussed in previous reports regarding why rates are rising at such a fast clip. He notes, “Mortgage rates increased across the board last week following the recent rise in Treasury yields, which have moved higher due to unrelenting inflationary pressures and increased market expectations of more aggressive policy moves by the Federal Reserve.”