Trending mortgage rates

The average 30-year fixed rate mortgage (FRM) rate jumped to 6.50% in the week ending February 24, 2023. The average 15-year FRM rate also bounced, now at 5.76%.  

Expect to see FRM rates slip in the short term as the Fed knocks down excess inflation before FRM rates resume their long-term upward trend which, in 2013, introduced a half-cycle of some 30 years of rising FRM rates. 

The 2020-2021 period of the Pandemic Economy saw FRM rates artificially reduced to their lowest rates ever. FRMs will not see those lows in the 2023 recession. 

When the pandemic set in, the average 30-year FRM rate had risen to almost 4.0% which slowed price increases by reducing amounts buyers were able to borrow. Today’s post-pandemic rise in the FRM to 6.50% inflicts a further reduction in buyer purchasing power — which controls property pricing. This forces buyers dependent on mortgage funds to consider a home in a lower price tier (unlikely), or simply wait out the drop in property prices.  

Fundamentally, the setting of FRM rates is tied to the treasury bond market, as are capitalization (cap) rates. The 30-year FRM rate moves in tandem with the 10-year Treasury Note rate. Historically, the risk premium spread between the 10-yr T-Note rate and the 30-yr FRM rate is 1.5%. The spread is far greater for cap rates. 

However, on February 17, 2023, the 10-yr T-Note rate is 3.97%. Thus, the spread between the 10-year T-Note and 30-year FRM rate is a whopping 2.53%, a much steeper risk premium than the historical rate spread of 1.5%. Today’s high spread indicates lenders continue to pad their risk premiums in anticipation of future rate increases — and foreclosures due to defaults.

Source: First Tuesday Journal Editorial Staffs