Inflation talk pushes mortgage rates upward again

Mortgage rates are on the upswing again following comments from Federal Reserve officials last week indicating further tightening is on the way. 

After a 42-basis-point leap a week earlier, the 30-year fixed-rate mortgage average kept climbing, rising to 5.66% from 5.55% for the seven-day period ending Sept. 1, according to Freddie Mac's Primary Mortgage Market Survey. In the same weekly period a year ago, the 30-year average stood at 2.87%

"The market's renewed perception of a more aggressive monetary policy stance has driven mortgage rates up to almost double what they were a year ago," said Freddie Mac Chief Economist Sam Khater in a press release.

The 15-year fixed-rate average took a similar jump, increasing 13 basis points to 4.98% from 4.85% a week earlier. One year ago, the 15-year average came in at 2.18%.

And after falling seven days earlier, the 5-year Treasury-indexed hybrid adjustable-rate mortgage also surged upward, shooting up to 4.51% from 4.36% the previous week. In the same time frame last year, the 5/1 ARM averaged 2.43%.

Interest rates retreated earlier in August as inflation numbers showed the rise of consumer prices slowing, helping to bring the 30-year benchmark average down by more than half a percent over two weeks. 

But tides have been shifting quickly this year, with volatility the main characteristic of rate movements over the last few months. Inflation remains top of mind for both economists and consumers.

"While inflation measures are improving, the rate of inflation is still well above the Federal Reserve's long-term targets," said Paul Thomas, vice president at Zillow Home Loans, in a research post. "Data releases last week showed that economic activity is still robust and labor markets continue to be very tight."

Investors had earlier thought the Fed might proceed slowly when it came time to discuss another potential hike in the federal funds rate, but sentiment has clearly turned.

"With Fed officials all indicating a commitment to containing inflation as the main goal in the near term, markets have adjusted expectations to account for further significant increases," Thomas said.

Markets are now anticipating a 50- or 75-basis point hike in the federal funds rate in September following a speech made by Fed Chair Jerome Powell at the Jackson Hole Economic Forum on Friday. The possibility also exists for a higher terminal rate, Thomas said, which would apply additional upward pressure. 

The latest news throws another question mark regarding the best timing for buyers and sellers in a market still dealing with the hangover of record price growth and mortgage volumes last year, Khater said.

"The increase in mortgage rates is coming at a particularly vulnerable time for the housing market as sellers are recalibrating their pricing due to lower purchase demand, likely resulting in continued price growth deceleration," he said.