Rate hikes, Ukraine won't derail spring homebuying — necessarily

Rates remain low by historical standards and could retreat from recent highs. Lenders eager to make up for a precipitous drop in refinancings, meanwhile, are scrambling to win new business

Mortgage rates continue to surge this week, after the Federal Reserve Wednesday implemented its first short-term interest rate hike since 2018, and signalled additional tightening that could put upward pressure on rates.

But rising rates won’t necessarily derail the spring homebuying season, as rates remain low by historical standards and could retreat from recent highs. Lenders who are eager to make up for the precipitous drop in mortgage refinancings are scrambling to win business from homebuyers by relaxing underwriting standards.

While inventory and affordability are challenges, rising mortgage rates should help cool off red-hot home price appreciation, and “power buyers” are ready to help grease the skids for first-time and move-up homebuyers in many markets.

“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” Federal Reserve policymakers said Wednesday, in announcing a 25-basis point increase in the federal funds rate. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

Yields on 10-year Treasurys, a barometer for mortgage rates, surged after the Federal Open Market Committee signaled its intention to raise short-term interest rates six more times this year.

“With the unemployment rate below 4 percent, inflation nearing 8 percent, and the war in Ukraine likely to put even more upward pressure on prices, this is what the Fed needs to do to bring inflation under control,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association, in a statement.

Fratantoni noted that the Fed doesn’t expect inflation to drop back to its target level of 2 percent inflation until after 2024.

Although the Fed doesn’t have direct control over mortgage rates, it played a major role in bringing down rates during the pandemic by increasing its holdings of mortgage-backed securities and Treasurys by $120 billion a month.

Having wound down its “quantitative easing” program, the Fed now says it wants to begin reducing its nearly $9 trillion balance sheet “at a coming meeting” — a move that could put more upward pressure on mortgage rates.

“Although we anticipate that shrinking the balance sheet will begin this summer, we will be looking for details regarding the pace of the runoff and whether they would consider active MBS sales at some point to return to an all-Treasury portfolio,” Fratantoni said.

The MBA is forecasting that mortgage rates will rise to around 4.5 percent over the next year — a level they’ve already achieved, since the Fed has been broadcasting its intention to raise short-term rates, and start paring down its balance sheet.