Mortgage rates rise as debt ceiling standoff drags on

Washington, DC CNN

The debt ceiling standoff is beginning to impact mortgage rates, which have risen for the second consecutive week amid the uncertainty.

According to data released by Freddie Mac on Thursday, the 30-year fixed rate mortgage averaged 6.57% during the week ending 25 May. This is up from 6.39% in the previous week. The 30-year fixed rate was 5.10% a year ago.

Sam Khater is Freddie Mac's Chief Economist. He said that the U.S. Economy continues to show resilience, which combined with concerns about debt ceilings, has led to an increase in mortgage rates.

For the first time in 2011, mortgage rates reached 5%. They have been above 5% since then, except for one week. Since then, they've reached as high as 7.08 %. The last time this happened was in November. Since mid-March rates have fluctuated but stayed below 6.5%.

Rates rose this week to 6.5% due to the current state of uncertainty. Zillow predicts that mortgage rates and home-buying costs will rise by up to 8% if the US defaults on its debt. Even the threat that a deal will not be reached has a financial impact. Here's what you can do to prepare.

JiayiXu, Realtor.com's economist, noted that the rate rose this week, following the trend in 10-year Treasury yields. Investors closely monitor the ongoing debt ceiling talks and assess the direction of Federal Reserve policy.

'Although a government default is unlikely, the fear and panic that could accompany it may cause creditors to demand higher interest rates, which would result in a significant rise in borrowing costs for various types of loans, including mortgages', said Xu. "Resolving debt impasse sooner than later will mitigate the potential adverse effects on housing market which is already dealing with high prices and increased mortgage rates."

Federal Reserve rate moves

Investors are also looking closely at the Federal Reserve, as revealed by the minutes of the May meeting.

'Although the minutes showed a feeling of uncertainty about the future direction of monetary policies, investors expect a pause in the upcoming meeting following ten consecutive rate increases,' stated Xu. 'In general, officials agreed that it was important to closely monitor incoming economic data as well as maintain flexibility in the lead-up to the next policy meetings.'

The Fed doesn't set mortgage interest rates directly, but it influences them. Mortgage rates are influenced by the yields on US 10-year Treasuries. This is due to a combination between investor expectations, the Fed's actual actions and the Fed's reaction. Mortgage rates are affected by Treasury yields. When they rise, mortgage rates follow.

Mortgage Bankers Association reports that mortgage applications dropped last week as a result of the rate increases.

Bob Broeksmit is the MBA's president and CEO. He said that recent volatility in financial markets had pushed up mortgage rates, which contributed to a decline in applications for both purchase and refinance. Prospective sellers are still reluctant to enter the market due to high mortgage rates.

Xu said that high prices and rising mortgage rates are driving buyers to look for more affordable alternatives.

Xu said that despite the slowdown in the housing market, competition is increasing in markets with relatively low prices, especially in the Northeast and Midwest. As more and more buyers flock into affordable areas, the number of opportunities for first-time buyers is reduced.

The average mortgage rates are based on the mortgage applications that Freddie Mac has received from thousands of lenders in different parts of the country. Only borrowers with excellent credit and 20% down are included in the survey.