Home Sales Fall

Despite a lack of major economic news, it was a rough week for mortgage markets. The upward trend seen in recent months continued, and mortgage rates climbed to their highest levels in over two years. 

Long-term bond yields, including the yields that influence U.S. mortgage rates, have been moving higher around the world for several reasons. First, inflation remains elevated in many countries, and higher oil prices since the start of the conflict in the Middle East have added inflationary pressure. When investors expect inflation to remain higher, they typically want a larger return on their investments to protect their purchasing power. Second, investors are keeping a close eye on government spending. Governments around the world are running large deficits and need to issue more debt to fund them. With more bonds competing for money from investors, yields generally need to rise to attract buyers. Another factor is the huge amount of money being invested in artificial intelligence. Technology companies are spending heavily on building AI infrastructure, increasing their need for capital. That means they are also willing to offer higher returns on corporate bonds to attract investors. Put it all together, and there's a lot of demand for investor capital at the same time that the supply of bonds is increasing, pushing mortgage rates higher.

According to the Mortgage Bankers Association, higher mortgage rates in recent weeks have been negative for overall loan origination activity but have boosted demand for adjustable-rate loans that offer lower rates. Applications to refinance dropped 3% from last week and were a massive 62% lower than one year ago, at the lowest level since February 2025. Purchase applications fell 1% from the prior week and were down 11% from last year at this time. The adjustable-rate mortgage share of total applications rose to nearly 10%, the highest level in almost a year.

Bottom Line: Expect more volatility in mortgage rates as investors digest comments from Fed officials, upcoming economic reports, and changing oil prices tied to the conflict in the Middle East. Housing activity may be challenged if rates do not ease in the months ahead.

Looking ahead, attention will remain fixed on the conflict in the Middle East and oil prices. Investors also will monitor comments from Fed officials about future monetary policy. For economic reports, Personal Income and the PCE price index, the inflation indicator favored by the Fed, will be released on Wednesday. The ISM national manufacturing sector index will come out on Thursday. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation are always closely watched.