But mortgage rates are not high historically, and “real” mortgage rates, amid resurging inflation, are relatively low.
By Wolf Richter for WOLF STREET.
This spring selling season, which is now wrapping up, has been one heck of a disappointment for real-estate brokers, mortgage lenders, and mortgage brokers, after all the hype it received late last year and early this year. This was going to be the spring that pulls the housing market out of the freezer with below-5% mortgage rates and a flood of buyers unleashing pent-up demand or whatever.
But the opposite happened. Mortgage rates have remained in the historically normal-ish 6.5%-range, give or take a little, as the 10-year Treasury yield has risen amid resurging inflation now approaching 4%, and lots of talk about Fed rate hikes, instead of rate cuts. And home prices in many markets are still too high, after the price explosion from mid-2020 to mid-2022 and don’t make economic sense. And so here we go again…
Mortgage applications to purchase a home – a forward-looking indicator of home sales – fell further in the current survey week, the third week in a row of declines. It has been wobbling along near rock-bottom levels, down by 35% from the same week in 2019, according to data by the Mortgage Bankers Association today. The market is now in the fourth year of collapsed mortgage applications.
The average weekly mortgage rate for conforming 30-year fixed mortgages eased a little to 6.57% in the current reporting week, from the prior week (6.65%), which had been the highest in nearly a year, according to the MBA today.
This measure of the average 30-year fixed mortgage rate has been in the 6-7% range, except for some breakouts to the upside, since September 2022. This is not high.
With inflation currently at 3.8%, the “real” 30-year fixed mortgage rate (mortgage rate minus inflation rate) is only at about 2.8%, which is relatively low compared to the periods before 2009, before the Fed’s QE began forcing down long-term interest rates.
Between 2009 and 2022, the Fed bought trillions of dollars of securities, including mortgage-backed securities (MBS), with newly created money, which repressed mortgage rates below 3% during the pandemic era mega-QE.
But this massive amount of reckless money printing contributed to the worst inflation in 40 years. By 2021 and early 2022, with mortgage rates below 3% and inflation heading toward 9%, “real” mortgage rates (mortgage rate minus inflation rate) fell deeply into the negative. At the end of 2021 and in January 2022, “real” mortgage rates were -4%, better than free money, and when money is free, price doesn’t matter, and home prices exploded – and are now too high. We can thank the Fed for that.
And that inflation, which has refused to go back into the bottle, is now resurging again.
Also take a look at “real” mortgage rates in 2004 and 2025 (chart below). The Greenspan Fed pushed its policy rates down too far, for too long, as a result of the 2001 recession, dragging mortgage rates below 6% by early 2003, at the time the lowest in Freddie Mac’s data going back to 1971, and inflation resurged.
These below 6% mortgage rates, along with resurging inflation caused “real” mortgage rates to fall below 3%, and as low as 1%, which triggered what would become Housing Bubble 1, which then imploded spectacularly.
Low mortgage rates lead to high home prices, and affordability collapses as insurance, property taxes, HOA fees, and other expenses surge with home prices. Too-low mortgage rates have turned out to be very costly.
Mortgage applications to refinance a home react to changes in mortgage rates: When mortgage rates dip, homeowners – eager to refinance and doing online refi breakeven analyses on a daily basis – pounce. And when mortgage rates rise after that dip, demand dries up again.
Refis have no impact on the housing market per se (though the substantial fees, which are added to the new mortgage balance, have a substantial impact on the income of mortgage lenders and mortgage brokers).
But refis may have a positive impact on consumer spending when they lower the mortgage payments or provide cash that borrowers can spend on other stuff.
Some of the cash-out refi demand has shifted to Home Equity Lines of Credit. Amid higher interest rates, HELOCs may be the less expensive route to go for many homeowners that want to get some cash out of their home, and HELOC balances have surged.
This longer view of mortgage rates (blue) and applications to refinance a mortgage (red) demonstrates the inverse relationship between them:
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