The last few days of March offered some hope that 2022’s massive rate spike might be slowing down. The first few days of April crushed those hopes and things have only gotten worse as the new week begins. After breaking above 5% by the end of last week, Monday morning brought the average 30yr fixed rate up to 5.25%, a level not seen since 2009. To understand why, we have to revisit the general motivation for the rate spike. Before we do, let’s put ” massive ” in context. It’s not an overstatement considering this is the biggest, fastest jump in mortgage rates since at least 1994. [thirtyyearmortgagerates] As for the “why,” it’s actually fairly straightforward. The Federal Reserve (aka “the Fed”) is best known for setting the Fed Funds Rate which dictates the cost of the shortest term financing. It raises and lowers that rate to try to persuade inflation and employment to remain in certain ranges. In cases where the rate is cut to zero and the Fed thinks more needs to be done, they buy bonds (US Treasuries and mortgage-backed securities, specifically). Buying bonds creates excess demand in the bond market which in turn pushes longer-term rates lower. It’s basically a way for the Fed to influence both short and long-term rates. At the start of the pandemic, financial markets were in chaos and the Fed stepped in to cut rates to 0% and buy bonds at a faster pace than ever before. Rather than dial back those bond purchases when markets began to settle, the Fed concluded that it should continue providing as much monetary stimulus as possible in light of covid’s impact on the labor market. They justified this with the assumption that covid-driven inflation would subside as the pandemic subsided.
Mortgage Rates Are Lower Today, But Still Higher Than Last Week Today’s Rate Recovery Looks a Bit Bigger Than It Really Is