The August edition of At a Glance, the Housing Finance Policy Center’s reference guide for mortgage and housing data, shows the cash-out share of all refinances remaining elevated at 74 percent in July, the agency cash-out volume remaining low, and in a reversal, the FHA cash-out refinance volume now exceeding that from other agency channels.
Following a steep increase in 2022, mortgage rates have continued to climb in 2023. On a weekly basis, mortgage rates now sit at 7.23 percent. This is the highest level in over twenty years. The increase in mortgage rates over 2023-to-date has largely responded to an increase in the 10-year treasury rate, reflecting still solid labor market conditions as inflation begins to cool. While the low unemployment rate has given the Fed room to raise the federal funds rate, which has discouraged new mortgage originations, it has also helped current homeowners continue to pay their existing mortgage. Indeed, the story of the past six months is the dichotomy between those that are already homeowners and those that are not.
In January 2023, the 30-year fixed mortgage rate, measured by Freddie Mac’s Primary Mortgage Market Survey, retraced a portion of its 2022 increase, declining to 6.09 percent by February 2nd. Since then, mortgage rates have increased by 114 basis points. A portion of that increase, 35 basis points, reflects an increase in the primary mortgage risk premium. This is the difference between the 10-year Treasury rate, the risk-free rate that the 30-year mortgage is often priced off and the 30-year fixed mortgage rate. The increase in the primary risk premium largely reflected increased interest rate risk in the face of greater uncertainty over the macroeconomic outlook, the costs of originating mortgages now spread over fewer originations, as well as heavy bank selling of mortgage backed securities coupled with the continued runoff of the Federal Reserve portfolio. Evidence also suggests that prepayment and duration risk may have played a role as well.
However, most of the increase in mortgage rates since February reflects the rise in the 10-year Treasury rate. The table above indicates that the increase in the 10-year Treasury rate mirrors the increase in the federal funds rate, suggesting that monetary policy is playing a key role boosting mortgage rates. The impact of the rate on shorter-term federal funds on longer-term mortgage rates is likely amplified as inflation has cooled and the Fed as well as other economists have moved from their earlier predictions of a recession.
Price stability is one part of the Fed’s mandate. To bring down inflation to a rate consistent with price stability, often believed to be 2.0 percent, the Fed has increased the federal funds rate. The Fed’s ability to raise the federal funds rate in its fight against inflation has boosted the 10-year Treasury because job gains have been robust. As a result, the risk of reducing the federal funds rate is lower because the Fed’s other legislative mandate, maximum employment, remains intact helping to keep the unemployment rate low.
A low unemployment rate, reflective of a strong economy, has helped boost mortgage rates to a 20-year high, reducing mortgage affordability and refinancability (see pages 9 and 23 of this chartbook). This has crippled new originations, as it is very challenging for renters to afford homeownership. While it is also difficult for current homeowners to take financial advantage of homeownership through refinancing, current mortgage borrowers are meeting their mortgage obligations. Consistent with a strong economy and low unemployment, serious mortgage delinquency rates are at a 17-year low (see page 33 of this chartbook). Indeed, part of the legacy of this necessary Fed tightening cycle may well have been an increase in the wealth gap between those who are homeowners and those who are not.