Mortgage Rates Increasing on Inflation Fears

Mortgage rates have ticked upward over the past few days in response to market activity around the 10-year Treasury Bond. According to, the average interest rate for a 30-year fixed mortgage has increased from 5.00% to 5.39% in just a few days.

An article in today’s Wall Street Journal goes so far as to proclaim that “Mortgage Rates Surge, Sap Hopes.” They cite similar interest rate figures from a different source and quote two people from Greater Hartford about the impact on their refinancing activities. One, a mortgage banker, has put about 50 refinancings on hold because the higher rates make the deals non-economic.

Recession vs Inflation

Conversations about the economy have been focused on avoiding a recession over the past year. Last February we wrote a post about the balance between recession and inflation, tying it to mortgage rates. At that time the Federal Reserve was lowering short-term interest rates in hopes of avoiding a recession. We reached a critical point in September, resulting in bank bailouts and other Federal interventions to support the economy.

The trigger for the recent rise in interest rates seems to be increased confidence in the economy. The stock markets have rallied since hitting lows in early March, suggesting that investors are more willing to take on risk. Moving into riskier investments has two primary consequences:

1. Selling pressure on the safe-haven securities that investors poured their money into when the future looked bleak. US Treasury Bonds are a major safe-haven asset due to widespread belief that the US Federal Government cannot default on its obligations. Selling pressure on bonds causes their value to go down, but their yield (interest rate) to rise.

2. Concern about future demand for the tremendous amount of US Federal Government debt, which takes the form of US Treasury Bonds. There is already a considerable supply available in the market, and more is scheduled to be auctioned to support the various stimulus programs. If demand decreases, then the government will be forced to offer higher interest rates in order to attract buyers.

Investors have reversed course and are now concerned that the Federal Government is doing too much. They are creating too large a deficit. They are issuing too much debt. They are ultimately printing too much money. Investors fear that all of these things will lead to inflation. Yesterday’s Wall Street Journal cover article goes into more detail about how all these pieces interact.

So what is a home buyer to do?

The first thing to realize is that even after the recent increase, mortgage rates are still very attractive from a historical perspective. We’ve had a number of years of low rates that were enabled by all of the fancy risk-spreading techniques that ultimately collapsed.

Looking back since 1990, Federal Housing Finance Board data shows that mortgage rates used to be higher – generally 7% or above before 2002. Maybe they’ll head back to those levels; maybe they won’t.

Buyers currently engaged in a search should make sure their price range is appropriate for the current interest rates, and would still be okay if rates rose a little more. You don’t want to be in the position where you find a home at the top of your price range but can no longer afford it because of a mortgage rate increase.

If buying a home is important to you, then you should proceed as planned. Maybe you won’t lock in your rate at the absolute low. But in 3 years you might be very happy with the rate you received. And if this is a temporary spike, and rates move lower again, you will always have the option to refinance.