Mortgage Rates Move Higher as Fed Signals Rate Hikes Are Coming

February 1, 2018 — 2:00 PM EST

Mortgage rates moved higher on Thursday, extending their march upward in January after the Federal Reserve signaled that three rate hikes are likely coming this year. While expected by Wall Street, the commentary made during the Fed's first meeting of the year, in which it left rates unchanged, sent mortgage rates higher. Many observers expect the Fed to start raising interest rates at its March meeting.

According to weekly data from Freddie Mac, for the week ending Feb.1, the rate on a 30-year fixed-rate mortgage was 4.22%. This marked an increase from the week that ended on Jan. 25, when that rate stood at 4.15%. Freddie Mac also reported that the rate on a 15-year fixed-rate mortgage now stands at 3.68%, up from 3.62% last week, while a five-year adjustable-rate mortgage, or ARM, has a rate of 3.53%, up from 3.52% last week.

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With the economy booming, a tight labor market and strong earnings on the part of corporations, mortgage rates have been increasing all month. According to Zillow, rates are up almost 30 basis points during January. Zillow said that, in addition to the strong showing from the U.S. economy, the European and Japanese economies are generating their strongest performances in a decade or more, which is also affecting mortgage rates.

The increasing mortgage rates are having a negative impact on applications for new home loans and causing some analysts to worry about the spring real estate season. Mortgage applications dipped 2.6% last week as mortgage rates continued their march higher, according to the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending Jan. 26. Refinancing home loans, which are the most sensitive to changes in mortgage rates, saw a 3% decline in applications. However, applications are still 3% higher than they were a year ago. According to the trade group, the refinancing share of mortgage activity has decreased to 47.8% of all applications and marks its lowest level since August. In the previous week, refinance loan applications accounted for 49.4% of all applications. Meanwhile, the share of adjustable-rate mortgage applications jumped to 5.7% of all loans, the Mortgage Bankers Association said.

With the real estate market heading into the spring selling season, the increasing rates suggest that there are reasons for concern. Even a mortgage interest rate of 4.5% is low in a historical context, but borrowers have gotten used to rates below that and therefore may balk at the idea of borrowing at current rates to purchase a home. For first-time home buyers, even a slight uptick in mortgage rates could preclude them from homeownership.