Debt-Ceiling Drama Causes Mortgage Rates to Rise

by | May 25, 2023

In recent weeks, mortgage rates have experienced a notable increase, marking the second consecutive week of upward movement. This rise is primarily attributed to the prevailing uncertainty surrounding the debt-ceiling standoff. As the U.S. economy demonstrates resilience and concerns regarding the debt ceiling persist, mortgage rates have continued to climb. In this blog post, we will delve into the factors behind this trend and its potential impact on the housing market.

The Numbers: The 30-year fixed-rate mortgage averaged 6.57% in the week ending May 25, showing an increase from the previous week’s 6.39%. For the majority of the past year, mortgage rates have remained above 5%, reaching as high as 7.08% in November. Until this week, rates have fluctuated but generally stayed below 6.5%. However, the recent surge pushed them above this threshold. Click here to find out where you’d fall on this spectrum.

Potential Consequences of a Debt Default: In the event of a U.S. default on its debt, experts project a potential spike of 22% in home buying costs, leading mortgage rates to surpass 8%. Such a scenario could have severe repercussions for the housing market. To mitigate these adverse effects, it is crucial for the ongoing debt-ceiling negotiations to be resolved promptly.

Influencing Factors: Both the ongoing debt-ceiling negotiations and the Federal Reserve’s interest rate policy play significant roles in the movement of mortgage rates. Mortgage rates are intricately tied to the yield on 10-year U.S. Treasuries, which, in turn, are influenced by the actions of the Federal Reserve. The outcome of these negotiations and the central bank’s decisions will continue to impact mortgage rates.

Impact on Homebuyers: As mortgage rates rise, homebuyers become increasingly sensitive to these changes. High prices and elevated mortgage rates have pushed buyers to seek more affordable options, resulting in intensified competition in (what are normally) relatively affordable markets (“cheap areas”) and market subsets (condos, etc). First time homebuyers should be prepared for the possibility of higher borrowing costs and increased competition in their search for suitable housing.

Conclusion: The recent increase in mortgage rates, driven by the uncertainty surrounding the debt-ceiling standoff, demands attention from both current and potential homebuyers. The U.S. economy’s resilience and the outcome of debt negotiations will continue to shape the trajectory of mortgage rates. Resolving the debt impasse sooner rather than later would alleviate potential adverse effects on the housing market, which is already grappling with high prices and elevated mortgage rates. As the situation evolves, prospective homebuyers should closely monitor the market, be prepared for higher borrowing costs, and explore various housing options to adapt to the changing landscape.
Primary sources: here and here

In case you missed it: this is the article on the easiest way to pay off a 30 year mortgage over a decade early (and a link to the free tool).

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