Mortgage Rates Hit 5% in Shockingly Fast Climb

While many analysts predicted rising rates, the vast majority didn’t foresee mortgage rates hitting 5% less than four months into 2022. Since the latter end of 2021, mortgage rates quickly climbed back up after the real estate market experienced a faster-than-anticipated recovery.

Additionally, home prices continue to soar to record levels while the United States combats an age-old housing inventory issue. Meanwhile, the events transpiring in Russia and Ukraine coinciding with the ongoing supply chain challenges, create the perfect storm for soaring inflation. At this point, the Federal Reserve has its hand full attempting to reduce their balance sheet while simultaneously launching new rate hikes to temper inflation.

Mortgage Rates Hit 5% Faster Than Expected

Just a few months ago, economists predicted that mortgage rates would increase to 4% by the end of 2022. Also, many of them only expected rates to land somewhere in the 3’s. At the beginning of December 2021, The Mortgage Reports illustrated this with the highest prediction merely reaching 4.10%.

Now, a mere 105 days into the New Year, and mortgage rates hit 5%. In fact, the average 30-year fixed rate hasn’t reached this point since February 2011, just three years beyond the stock market downturn induced by the infamous Housing Bubble.

Why Did Mortgage Rates Hit 5%?

When discussing why mortgage rates hit 5%, economists generally point to one primary cause: inflation. During the early days of the coronavirus pandemic, the Federal Reserve purchased mortgage-backed securities to offset the economic downtown.

While this strategy achieved its goals, the economy recovered at a faster-than-expected rate. In the aftermath, the Federal Reserve now has to reckon with the continuously spiking inflation. With the latest Consumer Price Index report, inflation increased by 8.5%. In doing so, inflation achieved its highest level since December of 1981.

The Federal Reserve’s Course of Action

As with everything else, the Federal Reserve plans to act faster than investors originally anticipated. For months, investors expected rate hikes and a balance sheet reduction from the Federal Reserve. However, the release of March 2022’s Federal Reserve meeting minutes reflect that the Fed plans to rapidly trim their $4.6 trillion accumulation of Treasuries and mortgage-backed securities.

Ideally, the Federal Reserve hopes to achieve a “soft landing”, reducing their balance sheet enough to halt inflation without crippling the economy. Whether they can achieve this goal remains to be determined after mortgage rates hit 5%.

For legal guidance pertaining to mortgage rates and real estate as a whole, contact the attorney at Lee Scott Perres, P.C.