Mortgage interest rates in the United States moved higher last week across multiple loan types, with the most common 30-year fixed mortgage approaching its highest level in roughly a year. Industry data show the upward movement followed a restart in U.S.-Iran fighting that pushed energy prices up and lifted the inflation-sensitive Treasury yields that serve as benchmarks for residential borrowing costs.
According to Mortgage Bankers Association figures, the contract rate on a 30-year, fixed-rate mortgage climbed 7 basis points to 6.76% in the week ended July 24. The 15-year fixed-rate product saw an 11-basis-point increase to 6.15%, marking its strongest reading in just over a year. Adjustable-rate mortgages also trended upward: the rate on a 5-year ARM edged up to 5.98% over the same period.
Market participants were bracing for a Federal Reserve policy announcement scheduled for later on Wednesday, with broad expectations that interest-rate increases are likely either imminently or within the next two months. Those expectations, coupled with recent moves in energy markets, have made a swift retreat in mortgage rates unlikely in the near term.
Inflation metrics that the Fed monitors were running above the central bank's 2% target - the measure was recorded at a 4.1% annual rate in May and was expected to have eased to 3.7% in the subsequent month. Analysts noted that this easing may be temporary if Middle East tensions continue to exert upward pressure on energy prices and on overall inflation.
Longer-dated Treasury yields, which help determine mortgage pricing, have been under upward pressure. The 10-year Treasury note yield was around 4.63% on Wednesday, remaining close to an 18-month peak near 4.70% reached the prior week.
The rise in borrowing costs has had a tangible effect on mortgage activity. The MBA's mortgage market index fell 6.4% on a seasonally adjusted basis to its lowest level in a year. Refinance applications bore the brunt of the decline, slipping 9.9% to a 13-month low, while applications for purchase loans fell as well.
"This upward trajectory in rates continues to significantly impact refinance borrowers, with a 10% decline in refinance applications, including a steeper drop in government refinances," said Joel Kan, MBA’s deputy chief economist. "Despite housing inventory increasing in certain markets, higher rates have added to ongoing affordability challenges for many homebuyers, which drove the decrease in purchase activity over the week."
In short, the combination of geopolitical developments, a higher energy price backdrop, persistent inflation readings and elevated Treasury yields has kept mortgage rates elevated. That environment is weighing on both refinance activity and home purchase demand as borrowers face reduced affordability and the prospect of further rate increases in coming weeks.
Key elements to watch going forward include the Fed's upcoming policy decision, the course of Middle East tensions and resulting movements in energy prices, and the trajectory of longer-term Treasury yields that serve as a benchmark for mortgage pricing.