Recession worries cause mortgage rates to cool

Following sharp spikes driven by inflation worries, geopolitical concerns and Federal Reserve moves, mortgage rates have begun to reverse course, decreasing for the second week in a row.

The average of the 30-year fixed rate mortgage dropped 15 basis points to 5.1% from 5.25% one week earlier for the seven-day period ending May 26, according to Freddie Mac’s Primary Mortgage Market Survey. Even with the latest drop, the current average is still almost two full percentage points higher than where it stood at the end of 2021 when it came in at 3.11%. In the same week a year ago, the 30-year average was at 2.95%.

Various factors resulted in see-saw action over the past seven days, but ultimately drove the average downward, said Paul Thomas, vice president of capital markets at Zillow.

“While strong retail sales figures drove rates higher early in the week, rates declined later in the week on fears of recession,” Thomas said in a research blog post. 

“Large retailers reported disappointing earnings last week and markets reacted with declines in equity prices and “risk-off” trades, driving rates lower,” he added. 

Talk of a possible recession has grown louder in the past month in the banking industry, with Fannie Mae also recently signaling one could begin in the second half of 2022. Recessions typically lead to lower interest rates aimed at boosting consumer spending. 

Even as home prices rose to record highs last year, housing demand remained elevated given the lower interest rates. But the combined effect of high prices and rates surging this year to highs not seen since 2009 is now leaving a mark, according to Freddie Mac Chief Economist Sam Khater.

“Despite the recent moderation in rates, the housing market has clearly slowed, and the deceleration is spreading to other segments of the economy, such as consumer spending on durable goods,” he said in a press release. 

In the past two weeks, various reports showed sales of both previously owned and newly built homes falling to early 2020 levels. New housing starts also decreased in April. 

Along with the drop in the 30-year rate, the average for 15-year mortgages similarly fell. The 15-year average clocked in at 4.31%, 12 basis points lower than 4.43% reported the previous week. One year ago, the 15-year rate stood at 2.27%.

The 5-year Treasury-indexed hybrid adjustable rate, though, increased for the 13th straight week, rising another 12 basis points to an average of 4.2%. Seven days earlier, the average came in at 4.08%, while in the same weekly period a year ago, the 5/1 ARM came in at 2.59%.