Banking turmoil sends mortgage rates downward

Market reaction to banking collapses over the past week drove mortgage rates lower for the first time in over a month, according to the latest data from Freddie Mac. 

The average 30-year fixed mortgage rate fell 13 basis points to 6.6% for the seven-day period ending March 16, according to Freddie Mac's weekly Primary Mortgage Market Survey. A week earlier, the average came in at 6.73%, while in early February in the last survey before a five-week runup, the 30-year rate stood at 6.09%. During the same reporting period last year, the average sat more than two percentage points lower at 4.16%.

The 15-year fixed rate averaged 5.9%, coming down from 5.95% one week ago. The current rate is now over 2.5% percentage higher than its level in mid March 2022.

"Turbulence in the financial markets is putting significant downward pressure on rates," said Freddie Mac Chief Economist Sam Khater in a press release.

Banking industry turmoil over the past seven days leading to government seizures of Silicon Valley Bank and Signature Bank spooked investors, driving them toward Treasuries. Yields of 10-year Treasuries, which mortgage rates typically move in tandem with, fell in the past week from $3.75 on the morning of March 10 to $3.50 as of noon Thursday. But volatility has marked its movements, with the yield plunging over the weekend to $3.48 on Monday morning as the extent of panic among Silicon Valley Bank customers became clear.  

A gradual recovery early this week came to a halt on Wednesday, as news spread of troubles at global banking firm Credit Suisse. The 10-year yield dropped from $3.67 late Tuesday to $3.41 by the next morning.

The events of the past several days have now thrown recent rate forecasts largely out the window. With Jerome Powell and the central bank providing the fuel behind the upward movement in February due to consistent hikes of the federal funds rate over the past several months, calls are growing for the Federal Reserve to reevaluate the strategy. 

Before last weekend, many analysts predicted — and Fed leaders signaled the likelihood — that more interest rate hikes were forthcoming in a continued effort to cool inflation. Government numbers showed inflation slowing in February, but still at 6% on a year-over-year basis. Some are blaming recent high rates, though, on the capital concerns banks are facing. 

Sam Hall/Bloomberg

Heightened uncertainty is leading "economic actors to pull back on spending, investing and flee to safety," said Orphe Divounguy, senior macroeconomist at Zillow Home Loans. "As a result, longer-term yields – including mortgage rates — are declining," 

"Going forward the Fed will have to advance its goal for price stability while also limiting financial stability risks," she said. 

The spotlight is now thrown on the next meeting of the Federal Open Market Committee, scheduled for March 21 and 22 when central bank officials will make its next rate-hike decision. Despite the upheaval over the past week, there's still potential for a 25 basis point increase, some housing economists said early this week. But the path forward for the rest of the year remains a question mark.

Regardless of the outcome, further rate volatility should come as no surprise after the meeting, according to Divounguy.

The current pullback in rates, though, could lead consumers back to the market in the short term, according to Khater. Purchase applications picked up at the end of last week, according to the latest data from the Mortgage Bankers Association.

"During times of high mortgage rate volatility, homebuyers would greatly benefit from shopping for additional rate quotes," he said.