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Why are House Prices Still Rising During the War?

  Mortgage rates in the US have fallen sharply as the market grapples with the impact of the war, which also means the surge in home prices is likely to continue.

  According to Mortgage News Daily, from the beginning of this year to last Friday (February 25), the average interest rate on the much-watched 30-year fixed mortgage has risen by nearly a full percentage point to 4.18%.

  But then, it fell to 4.04% and 3.9% on Monday (Feb 28) and Tuesday (March 1) respectively. It was the largest two-day drop since the pandemic began in March 2020.

  Falling mortgage rates will give homebuyers more purchasing power as the housing market begins what has traditionally been a very busy spring, which will keep already record-high home prices up.

  US home prices rose 19.1% in January from a year earlier, according to a report released Tuesday by CoreLogic, a provider of residential property information, analysis and services. This is the highest level of growth in 45 years since CoreLogic started tracking prices.

  According to CNBC, CoreLogic chief economist Frank Nothaft said: “Inventory of homes for sale continued to hit the lowest levels in an entire generation in December and January. Buyers have been driving up prices due to limited supply in the market.”

  Norsha Ford also added that the rise in mortgage rates since January has eroded affordability for homebuyers. Price growth should slow in the coming months, but it all depends on how long this rate cut will last. The decline is likely to be short-lived, given that none of the other factors contributing to the pressure on the mortgage market have anything to do with the Ukraine crisis.

  On Tuesday, the US 10-year Treasury yield fell to its lowest level since late January, while mortgage rates roughly tracked changes in the US 10-year Treasury yield. Markets are experiencing turmoil due to the war.

  For now, the move in US Treasuries has led to a pullback in mortgage rates. But changes in mortgage rates will depend more directly on demand for mortgage-backed bonds (MBS). These bonds typically follow the 10-year Treasury note, but not always. And now is one of those times when that wasn't the case.

  Unlike US Treasuries, the duration of mortgage-backed bonds can vary based on refinancing needs. A 30-year fixed loan rarely lasts 30 years. If people refinanced or sold their homes early, the bond maturities wouldn't be that long. Mortgage News Daily chief operating officer Matthew Graham (Matthew Graham) said the current batch of mortgage-backed securities is not expected to last more than five years, given the current increase in interest rates and increased refinancing opportunities.

  Over the past three months, the 5-year Treasury note has gained 0.10% more than the 10-year Treasury note. Because mortgage-backed bonds are behaving more like short-term 5-year US Treasuries, they struggle to keep pace with 10-year Treasurys.

  Graham explained: “The prospect of the Fed buying bonds also has a greater impact on mortgage-backed bonds than on Treasuries, because the Fed accounts for a larger percentage of total demand for new mortgage-backed bonds. So if the Fed Get out (it's getting out now), and the price of the mortgage-backed bond must fall further to attract buyers. All else equal, the lower the price of the mortgage-backed bond, the higher the interest rate.”

  However, given the current geopolitical tensions, demand for short-term bonds has increased, so mortgage rates are moving more in step with the broader bond market. The question is how long this will last, and the answer still depends on how the situation will develop in Ukraine and elsewhere.