Following two weeks of declines, mortgage rates rose this week as U.S. Treasury yields increased. Over the long-term, we expect rates to continue to rise as inflation broadens and shortages increasingly impact many segments of the economy. However, uncertainty about the war in Ukraine is driving rate volatility that likely will continue in the short-term.

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Geopolitical tensions caused U.S. Treasury yields to recede this week as investors moved to the safety of bonds, leading to a drop in mortgage rates. While inflationary pressures remain, the cascading impacts of the war in Ukraine have created market uncertainty. Consequently, rates are expected to stay low in the short-term but will likely increase in the coming months.

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Mortgage rates jumped again due to high inflation and stronger than expected consumer spending. 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.

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The economy lost some momentum in January, leaving mortgage rates unchanged from last week and relatively flat for the third consecutive week. This stagnation reflects the economic impact of the Omicron variant of COVID-19, which we believe will subside in the coming months. As economic recovery continues going into the spring and summer, mortgage rates are expected to resume their upward trajectory. In the meantime, recent data suggests that homebuyer demand continues to be elevated as supply remains low, driving higher home prices.

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The rebound in homebuyer demand continued this week, driven by mortgage rates that hover near record lows. This turnaround in demand, particularly by those who have higher incomes than the typical household, also reflects deferred sales from the Spring.

Given the recent volatility of the ten-year Treasury yield, it’s not surprising that mortgage rates again have dropped. These low rates combined with high consumer confidence continue to drive home sales upward, a trend that is likely to endure as we enter spring.

Mortgage rates fell to the lowest level in thirteen weeks, as investors sought the quality and safety of the U.S. Treasury fixed income markets. The drop in mortgage rates, combined with the strong labor market, should propel a continued rise in homebuyer demand.

With Federal Reserve policy on cruise control and the economy continuing to grow at a steady pace, mortgage rates have stabilized as the market searches for direction. The risk of an economic downturn has receded and, combined with the very strong job market, it should lead to a slightly higher rate environment. Since early September, when mortgage rates posted the year low of 3.49 percent, rates have moved up to 3.73 percent this week. Often, while higher mortgage rates are deleterious, improved economic sentiment is the reason that these higher rates have not impacted mortgage demand so far.

With both the unemployment rate and mortgage rate below four percent and near historic lows, it is no surprise that the housing market regained momentum with home sales and construction at or near decade highs. The fall housing market is poised to continue with steady gains in prices and solid sales activity.

Despite the rise in mortgage rates, economic data improved this week – particularly housing activity, which gained momentum with a noticeable rise in purchase demand and new construction. Homebuyers flocked to lenders with purchase applications, which were up fifteen percent from a year ago and residential construction permits increased twelve percent from a year ago to 1.4 million, the highest level in twelve years. While there was initially a slow response to the overall lower mortgage rate environment this year, it is clear that the housing market is finally improving due to the strong labor market and low mortgage rates.