Mortgage rates are dropping just as home prices hit another record

Home offered for sale by owner on January 20, 2022 in Chicago, Illinois.

Scott Olson | Getty Images

Mortgage rates are dropping as markets struggle with the fallout from Russia’s attack on Ukraine, meaning home prices are likely to continue rising.

The average rate on the popular 30-year mortgage increased nearly a full percentage point from the start of this year through last Friday, when it hit 4.18%, according to Mortgage News Daily. It is trending less than 4% on Tuesday.

This will give homebuyers more purchasing power as the historically busy spring season kicks off. It will also keep record home prices on the rise. Prices in January rose 19.1% year-over-year, according to a report Tuesday from CoreLogic. This level of growth is the highest in 45 years, when CoreLogic began tracking prices.

“In December and January, inventory continued to sell at the lowest level we’ve seen in a generation,” said Frank Nothaft, chief economist at CoreLogic. “Buyers continued to raise prices in exchange for limited supply in the market.”

Nothaft added that the rise in mortgage rates since January has eroded buyer affordability, and price growth is expected to slow in the coming months, but it all depends on how long this drop in rates lasts. It can be brief, given the way other factors affect the mortgage market that have nothing to do with the Ukraine crisis.

Mortgage rates loosely track the yield on the 10-year US Treasury, which fell on Tuesday to its lowest level since late January. The markets are witnessing volatility due to the Russian invasion of Ukraine.

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Currently, the move in Treasurys is causing mortgage rates to fall. But mortgage rates are more directly governed by the demand for mortgage-backed securities. These bonds often mimic the 10 years, but not always, and now is one of those times that isn’t always the case.

Unlike Treasuries, the term of MBS can vary depending on the demand for refinancing. A 30-year fixed-rate loan rarely lasts for 30 years. If people refinance or sell their homes faster, the life of the bond will not last long. With rates now higher, and more opportunities for refinancing, Mohammed bin Salman’s current crop is not expected to last more than five years, according to Matthew Graham, chief operating officer of Mortgage News Daily.

Over the past three months, 5-year Treasuries have gained 0.10% more than 10-year Treasuries. Because mortgage bonds behave like shorter 5-year Treasuries, they’ve had a harder time keeping up with 10 years.

“Fed bond purchase expectations also hurt MBS more than Treasuries because the Fed represents a larger proportion of the total purchase order of the new Mohammed bin Salman,” Graham explained. “So if the Fed leaves (which it is currently doing), MBS prices have to go down further to attract buyers. Lower MBS prices = higher rates, all other things being equal.”

However, given the geopolitical tensions now, there has been more demand for short-term debt, so mortgage rates are in line better with the broader bond market. The question is how long it will last, and the answer depends on what is happening in Ukraine and abroad.

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