Fed Considers Rate Hike Amid Oil Shock... U.S. Mortgage Rates Surpass 6.5%

This Week's 30-Year Mortgage Rate Hits 6.51%

Existing Homeowners Hold Off on Selling Amid High Rates

High Interest Rates Lead to Housing Supply Shortage

As international oil prices have surged in the wake of the Iran war, the Federal Reserve (Fed) has begun to consider the possibility of raising interest rates, which has in turn caused U.S. 30-year fixed-rate mortgage rates to spike once again. Unlike existing homeowners, younger generations and those without homes are bearing a significant burden from these mortgage rates.

According to Bloomberg News on the 21st (local time), the average U.S. 30-year fixed mortgage rate, which is based on long-term government bond yields, rose to 6.51% this week. This marks the highest level since August of last year. The yield on the 10-year U.S. Treasury recently climbed to around 4.6%, and Bloomberg reported that there is now talk in the market about the possibility of it surpassing 5%.

Federal Reserve (Fed). Reuters Yonhap News

The upward trend in U.S. Treasury yields started with the sharp rise in oil prices following the Iran war. As the price of Brent crude soared due to the conflict, the market’s breakeven inflation rate (BEI) has risen recently. As a result, the market has started to factor in the possibility of the Fed raising its benchmark interest rate again.

Daniel Ivascyn, Chief Investment Officer (CIO) at Pacific Investment Management Company (PIMCO), one of the world’s largest bond managers, warned, "If long-term expected inflation becomes even more volatile, the central bank will have no choice but to tighten policy even amid an economic slowdown," adding, "This would be the most painful scenario for the market." This suggests that rising interest rates could put pressure on both the stock and corporate bond markets, resulting in a "compound shock."

As mortgage rates rise, the burden is increasing for Americans trying to buy homes. Najima Roberson, a 42-year-old renter running a childcare business in Harrisburg, Pennsylvania, finally found an old house priced at $340,000 after two years of bidding wars, but she is now hesitating to sign the contract due to the 6.8% mortgage rate. She told Bloomberg, "It’s extremely stressful," and added, "Interest rates need to be at a reasonable level for me to buy a house."

During the COVID-19 pandemic, the Fed lowered its benchmark interest rate to near zero, allowing about half of Americans to secure mortgages at rates below 4%. In contrast, Bloomberg pointed out that recent new buyers are unable to cope with the surging borrowing costs, making it difficult for them to enter the market at all.

Existing homeowners are choosing not to sell their homes due to high interest rates and are instead staying put, leading to a shortage of available properties, according to Bloomberg. Despite expectations for a recovery in transactions during the spring peak season for the U.S. real estate market, the actual transaction volume remains more than 20% lower than in 2019, before the pandemic.

The minutes of the April Federal Open Market Committee (FOMC) meeting, released the previous day, revealed increased concerns about the upside risk to inflation. Unlike the minutes from March, the phrase "additional tightening" appeared, implying the possibility of a rate hike. However, participants at the time still assessed that long-term expected inflation remained stably managed.

Ivascyn stated, "Historically, past energy shocks have almost always led to recessions," and added, "The longer and more severe such conditions persist, the higher the likelihood of a market downturn." He further noted, "This could lead to falling stock prices, a credit crunch, and declining bond yields."

This content was produced with the assistance of AI translation services.