Will rate hikes doom home price increases?

The latest readings from the Consumer Price Index blew up the bond market Wednesday. As the CPI increased 3.5% from one year ago March (higher than anticipated by many market participants), the 10-year Treasury bond exploded to 4.55%. It started the day at 4.35%. Consumers’ 30year fixed mortgage rates tend to shadow the 10-year Treasury rates.

Freddie Mac’s 30-year fixed rate survey averaged 6.88%, just 6 basis points higher than the previous week.

The weekly survey starts the previous Thursday through Wednesday at 11:59 p.m. The CPI report came out Wednesday morning. Timing is such that we’ll see the CPI and consequential bond market affect Freddie rates this week.

Undoubtedly, rates will top 7% with the next Freddie report. The Mortgage Bankers Association already reports a 7.01% rate.

For perspective, two weeks ago, I reported that local borrowers could capture a 30-year fixed rate at 6.25% with 1 point cost. Today, that 30-year fixed rate is 6.625% at 1 point cost. Rates jumped 0.375%. Due to larger conforming loan sizes than the rest of the country, California mortgage rates tend to be cheaper than Freddie’s national survey numbers.

The principal and interest payment on $760,550 (maximum conforming loan amount) at 6.25% is $4,720. At 6.625% the payment is $4,908. The payment jumps $188 or 4% in the blink of an eye.

“The CPI came in hotter than I expected. The Fed won’t ease until the fall with two rate drops,” predicted Mark Zandi, the chief economist at Moody’s Analytics. “Mortgage rates are close to 7% now. They will top out at 7.5%. This puts an end to home price increases.”

Zandi believes we’ll see mortgage rates close to 6% by the end of this year.

Jordan Levine, chief economist of the California Association of Realtors, also sees just