Rates climb, with war threatening to affect them going forward

Mortgage rates continued their rise, even with uncertainty around world events impacting bond prices, Freddie Mac said.

Even though yields on the 10-year Treasury did back down from a high of 4.89% last Friday, prior to Hamas' attack on Israel, to a low of 4.56% on Wednesday, they are still relatively elevated.

Freddie Mac's Primary Mortgage Market Survey found a fifth consecutive increase for the 30-year fixed rate product, up eight basis points for the week of Oct. 12, to 7.57% from 7.49%; one year ago, it was at 6.92%.

The 15-year FRM averaged 6.89%, up 11 basis points from last week's 6.78%. For the same week in 2022, the 15-year FRM averaged 6.09%.

"The good news is that the economy and incomes continue to grow at a solid pace, but the housing market remains fraught with significant affordability constraints," said Sam Khater, Freddie Mac chief economist, in a press release. "As a result, purchase demand remains at a three-decade low."

However, Zillow's rate tracker aligned more with the movements in the 10-year Treasury, down 15 basis points to 7.35% on Wednesday from an average of 7.5% for the prior week.

Besides the events in the Middle East, "Federal Reserve officials also signaled the end of rate hikes, adding to expectations of global economic disruptions," said Orphe Divounguy, senior macroeconomist at Zillow Home Loans, in a Wednesday night statement, prior to the CPI release. "All that, plus the potential for higher oil prices pushed investors toward the safety of Treasury bonds and mortgage-backed securities."

But it is not a turning point for mortgage rates, Divounguy said, as investors tend to "misprice the cost of armed conflict," which normally leads to lower growth and higher inflation.

Industry groups, including the Mortgage Bankers Association, sent the Fed a letter urging it to make two statements: that it is not contemplating further rate hikes and that it won't sell off mortgage-backed securities until the Treasury yield curve normalizes.

The Thursday morning reaction to the Consumer Price Index rising 3.7% annually on an unadjusted basis from September 2022, was to push the 10-year yield back up again, to 4.66% by 11:45 a.m.

Month-to-month, the CPI was up 0.4% seasonally adjusted in September, down from 0.6% rise for August.

"The September CPI report paints an encouraging picture as far as the Federal Reserve is concerned," said Ksenia Potapov, an economist at First American Financial, in a statement. "Inflation is trending downward, especially after stripping out the volatile food and energy components, while the largest monthly contributor, shelter, is set to decline in the months ahead."

This data, combined with the recent rise in bond yields gives the Fed little reason for a short-term rate hike at its next meeting, Potapov said.

Agreeing — to a point — is Marty Green, principal at the mortgage law firm of Polunsky Beitel Green, whose starting point was the CPI did not show enough improvement.

Still, "This report probably doesn't change the likelihood of the Fed continuing to hold rates steady in November, but it does support the narrative that any reduction in the Fed discount rate next year may not be realized until later in 2024," Green said in a statement. "For a mortgage and real estate market that is already struggling, this prospect may be scarier than Halloween."

However, given that the annual CPI came in slightly higher than expected, along with the minute release from the last meeting, the data supports one more Fed rate hike, said Nigel Green, CEO of foreign exchange trader DeVere Group.

"We expect there to be one last 25 basis point hike at its two-day meeting beginning Oct. 31," Green said. "The Fed will be conscious of growing uncertainty of the trajectory of the world's largest economy and the risks of overtightening — especially in times of growing geopolitical uncertainty; while at the same time, want to avoid complacency in the continuing battle against inflation."