Brace for Mortgage Rates to Climb Higher After the Jobs Report

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The rising cost of buying a home has cooled the market this year. In a roundabout way, Friday’s jobs report will add to home affordability pressures in the short term.

Following a year of rapid increases, mortgage rates are slated to “test new highs” in the wake of Friday’s jobs report, Lawrence Yun, the National Association of Realtors’ chief economist, said in a statement.

The link between the cost of purchasing a home and the strength of the labor market may not be immediately obvious, but it comes down to one factor that has influenced recent fluctuations in mortgage rates: the Federal Reserve’s fight against inflation.

Expectations of a more aggressive Fed have sent 10-year Treasury yields, with which mortgage rates often move, higher this year. The average rate on a fixed 30-year home loan has climbed as well, recently reaching their highest rate in 15 years before pulling back slightly this week, according to Freddie Mac.

That is one way that economic reports, such as Friday’s jobs report, impact the housing market. Treasury yields gained in the wake of the Friday report as markets interpreted the release as a sign that the Federal Reserve will remain aggressive in combating inflation.

The same factors that drive Treasuries higher will likely have an impact on mortgage rates. Mortgage rates “will test 7% and stay at this level for a while, possibly for one month, before breaking either lower to 6.5% or higher to 8%,” Yun wrote in a statement to Barron’s. “The direction will depend upon new incoming economic data.”

This year’s increase in mortgage rates has added significantly to the cost of financing a home purchase: the buyer of a $400,000 home at this week’s average 30-year fixed rate would owe roughly $690 more a month than in late 2021 due to rising mortgage rates. At 7%, such a purchase would cost roughly $760 more than at the end of last year, Barron’s previously reported.

Higher rates have slowed the housing market from its previously-frenzied pandemic pace and softened prices. U.S. home prices are likely to drop 8% from peak to trough due to higher expectations for near-term interest rates, Capital Economics wrote in a Friday note.

“Whether they are openly admitting it or not, central banks clearly now accept that recessions and housing downturns are a price worth paying to get consumer price inflation back under control,” wrote Capital Economics’ Vicky Redwood. “However, once inflation has fallen, then falling house prices could be one reason why central banks will shift their attention quickly to cutting interest rates,” Redwood wrote. She added that rates could come down in the U.S. by the end of 2023.

Mike Fratantoni, chief economist at the Mortgage Bankers Association, says he expects mortgage rates to fall below 6% by the end of the year as U.S. and global economies slow down. “Our view is that we’re at a peak right now,” Fratantoni says. “The gathering evidence of a pretty sharp slowdown early next year, I think, will likely limit how much further mortgage rates can go up,” he said.

While economic reports will continue to play a role in mortgage rates’ movements, they aren’t the only factors driving mortgage rates. The 30-year fixed mortgage rate is about three percentage points higher than the 10-year Treasury yield right now, a wider gap than normal, says Fratantoni.

Some of that spread is due to the central bank’s balance sheet, as markets expect the Fed to eventually actively sell mortgage-backed securities it had purchased, Fratantoni says. Fed Chairman Jerome Powell said after last month’s Federal Open Market Committee meeting that these sales weren’t on the table anytime soon.

“But that really wide spread is also reflecting just incredibly volatile financial markets right now,” Fratantoni added.

Write to Shaina Mishkin at [email protected]