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Mortgage rate alert: New coronavirus variant pushes mortgage rates back down

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Heading into Thanksgiving, housing economists saw the worst of the coronavirus pandemic in the rear-view mirror, and nothing but rising mortgage rates ahead. But the sudden emergence of the omicron variant brings new uncertainty to the outlook for mortgage rates.

Worries about a resurgence of coronavirus cases are weighing on stock markets, and on U.S. Treasury yields, which plunged Tuesday morning. The yield on 10-year Treasury bonds fell by nearly 10 basis points, to 1.431 percent. Last week, yields were in the range of 1.65 percent.

That matters to homeowners and homebuyers because rates on 30-year mortgages are closely tied to 10-year Treasury yields. The average rate on a 30-year loan was 3.24 percent last week, according to Bankrate’s national survey of lenders, up from an all-time low of 2.93 percent in January.

Some mortgage watchers say the pandemic’s latest twist will push mortgage rates down. “For now, it’s all about omicron,” says economist Joel Naroff. “COVID is not going away anytime soon.”

Ken H. Johnson, a housing economist at Florida Atlantic University, also sees mortgage rates reversing course. “Uncertainty over the impact of the omicron variant and the potential for rising inflation is driving a lot of money to safe haven investments – mortgage bonds, 10-year Treasury notes, etc.,” he says.

Before the omicron variant grabbed headlines, mortgage rates had been poised to rise. The Federal Reserve this month announced its long-anticipated “taper” of asset purchases. While that move creates upward pressure, mortgage rates are unlikely to spike as a result of the taper. However, the Fed’s changing stance does set the stage for a gradual rise in rates. The Mortgage Bankers Association, for instance, expects the average rate on a 30-year mortgage to reach 3.5 percent by mid-2022 and 4 percent by late 2022.

Economists generally expect rates to rise by the end of 2022. As mortgage rates make a predicted slow climb to the 3.5 percent range, decreased purchasing power might ease some of the pressure on home prices.

Meanwhile, Federal Reserve Chairman Jerome Powell told a Congressional committee on Tuesday that he was looking at winding down the central bank’s buying of bonds and mortgage-backed securities faster than previously expected. Powell said that in light of a “very strong” economy, “it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner.”

The Fed ramped up those asset purchases as a way to fight the coronavirus recession. But the “taper” is expected to create upward pressure on mortgage rates.

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Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.