By Ryan Price, Virginia REALTORS® Deputy Chief Economist
Mortgage rates just rose to their highest level since March 2020 but are still historically low. According to Freddie Mac, the average rate for a 30-year fixed mortgage, as of January 13, 2022, was 3.45%. While this is about two-thirds of a percentage point higher than this time last year, and the highest level since March of 2020, it still remains very low by historic standards. Rates for 30-year fixed mortgages had been below 3% for much of 2021 and started to inch up slowly this past fall, hovering around 3.1% for most of November and December, before rising again over the last couple weeks.
Why are rates rising now? It is not surprising that mortgage interest rates are rising. Several factors that influence mortgage rates have been signaling upward pressure for months. While the Federal Reserve does not directly set mortgage interest rates, its actions impact whether they go up or down. At the Fed’s most recent meeting in December 2021, it became clearer that to combat rising inflation, it would seek a more aggressive dialing back of pandemic-era interventions that kept credit flowing and financial markets stable amid the recession.
Two factors are driving the Fed to hit the breaks on stimulus policies, which could impact mortgage rates:
Inflation increased rapidly in 2021. The Federal Reserve generally tries to keep inflation at about 2%. In December, the inflation rate was 7%, which is the highest it has been in decades. Rising inflation signals that the economy is becoming overheated, and that stimulus policies designed to prop up the economy are no longer needed.
Employment growth has been strong in 2021. The U.S economy added about 6.4 million jobs last year following record job losses in 2020. The unemployment rate in the U.S. dipped to 3.9% in December, down from 6.4% at the start of 2021, exceeding expectations. While job growth has been solid and unemployment is low, other factors remain a concern, such as low labor force participation. Nevertheless, positive employment conditions signal that the economic recovery is headed in the right direction.