30-year mortgage rates may climb to 3.5% by year end

Tight job market, signs of inflation will force Fed to change course on its loose monetary policies.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | May 23, 2021

The party is over for the lowest mortgage rates in U.S. history.

After landing at an all-time low 2.65% the first week of January, the Freddie Mac 30-year fixed climbed to 3% this week. That is an enormous, 35 basis points pop.

Raymond Sfeir, research director at Chapman University’s Anderson Center for Economic Research, points to the Fed’s $120 billion monthly bond-buying-binge (of which, $40 billion are for mortgage bonds) as a major factor in lower borrowing costs.

“There was a 25% increase in money supply,” said Sfeir. “The deficit is shooting through the roof.”

My goodness. Even the Federal Reserve finally woke-up.

It acknowledged the footsteps to inflation are here in this week’s April Fed meeting minutes. Meeting notes indicate if the economy continues to make rapid progress toward Fed goals, it might discuss adjustments to the pace of asset purchases. That’s code for putting a kibosh on the $120 billion bond buying binge.

The job market is front and center. Claims for unemployment insurance dropped to its lowest level since March 14, 2020, at 444,000, according to this week’s Labor Department data dump.

Labor Department data shows an astounding 8.1 million U.S. job openings.

Fed meeting participants cited everything from expanded unemployment benefits to child-care constraints, health concerns and retirement as roadblocks to bringing workers back.

Wages will have to crank-up significantly to attract more people back to the workforce.

With the cost of everything from gasoline to groceries shooting skyward, the current workforce is none too happy either. Even McDonald’s workers are worried. When was the last time you remember McDonald’s employees going on strike for higher wages?

Sfeir sees the 30-year fixed climbing to 3.4% by year end. And he sees mortgages at 4.7% by the spring of 2023.

The monthly payment was $2,015 for a $500,000 mortgage in January, when rates for the 30-year fixed fell to an all-time low of 2.65%, according to Freddie. At today’s 3% rate, that payment rises about 5% to $2,108.

Assuming Sfeir’s prediction of a year-end 3.4% rate, that payment would rise another 5% to $2,217. At 4.7% we see a whopper of an increase to $2,593, or about 15%.

From 2.65% in January to 4.7% just two short years later, we would see a 29% jump in the house payment for that same $500,000 mortgage.

Wages can’t keep pace.

Are we at the top of the home price mountain? Will home prices flatten? Or will we see a bursting bubble?

Jordan Levine, California Association of Realtors chief economist, sees mortgage rates around 3.5% by year end.

“I am not super worried about inflation,” said Levine.

Levine points to CAR affordability index at 27% as the first quarter of this year, compared with 11-12% affordability during the 2006-2007 bubble.

Still, Levine provided some caution.

“Buyers currently overbidding by 20% means property values have to continue to go up by 20%,” he said.

Freddie Mac rate news: The 30-year fixed rate averaged 3%, 6 basis points higher than last week. The 15-year fixed rate averaged 2.29%, 3 basis points lower than last week.

The Mortgage Bankers Association reported a 1.2% increase in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed-rate on a conforming $548,250 loan, last year’s payment was $72 more than this week’s payment of $2,294.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.25%, a 15-year conventional at 2%, a 30-year conventional at 2.69%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.25%, a 30-year conventional high-balance at 2.875% and a 30-year fixed jumbo at 2.625%.

Eye catcher loan of the week: A 30-year fixed at 3% without cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.