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After falling for three consecutive weeks, purchase mortgage rates jumped 14 basis points, reflecting the expectation that the Federal Reserve (The Fed) will maintain its tightening monetary policy to fight inflationary pressures.

According to the latest Freddie Mac PMMS, purchase mortgage rates this week averaged 5.23%, compared to 5.09% the week prior. A year ago at this time, 30-year fixed rate purchase rates were at 2.96%.

The government-sponsored enterprise index accounts solely for purchase mortgages reported by lenders during the past three days.

“After little movement the last few weeks, mortgage rates rose again on the back of increased economic activity and incoming inflation data,” said Sam Khater, Freddie Mac’s chief economist.

Another index also showed higher rates this week.

Black Knight’s Optimal Blue OBMMI pricing engine, which includes some refinancing data — but excludes cash-out refis to avoid skewing averages – measured the 30-year conforming mortgage rate at 5.5% Wednesday, up from 5.42% the previous week. 

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The 30-year fixed-rate jumbo was at 5.05% Wednesday, also up from 4.97% the week prior, according to the Black Knight index. 

Higher rates are reducing borrowers’ demand for mortgage loans. This week, mortgage application volume dropped 6.5% from the past week to the lowest level in 22 years: Refi applications declined 6% and purchase apps decreased 7%, according to the MBA.

The housing market is incredibly rate-sensitive, consequently, demand again is pulling back, according to Khater.

“The material decline in purchase activity, combined with the rising supply of homes for sale, will cause a deceleration in price growth to more normal levels, providing some relief for buyers still interested in purchasing a home,” he said.

Overall, mortgage rates are following the Fed’s inflation-fighting monetary policy. Minutes from the Fed’s meeting earlier this month showed policymakers emphasized the need to quickly raise interest rates to bring consumer prices closer to the Fed’s 2% goal. 

The central bank raised the interest rate by a half percentage point on May 4 and unveiled a plan to reduce its $9 trillion asset portfolio. The Fed also has repeatedly signaled it will continue to raise rates in 2022 and into 2023.

According to Freddie Mac, the 15-year fixed-rate purchase mortgage averaged 4.38% with an average of 0.8 point, up from last week’s 4.32%. The 15-year fixed-rate mortgage averaged 2.23% a year ago.

The 5-year ARM averaged 4.12%, with buyers on average paying for 0.3 point, up from 4.04% the week prior. The product averaged 2.55% a year ago. 

Economists expect the tightening monetary policy to reduce origination volume significantly in 2022 and 2023. The Mortgage Bankers Association expects loan origination volume to drop more than 35% to about $2.5 trillion this year, from last year’s $4 trillion. Meanwhile, the MBA expects 5.93 million home sales in 2022, compared to 6.12 million in 2021.

Fitch Ratings, however, in a May 31 report said the pace of falling mortgage originations has surpassed its expectations and it is likely to fall short of the industry forecasts by MBA and Fannie Mae.