Mortgage rates plunge just as home prices set another record

Home prices are likely to continue to rise as mortgage rates plummet because of the repercussions of Russia's attack on Ukraine.

The average rate on the popular 30-year fixed mortgage had risen close to a full percentage point from the start of this year up until last Friday, when it hit 4.18%, according to Mortgage News Daily. It is going to fall below 4% Tuesday.

As the spring season kicks off, this will give buyers more purchasing power. It will keep record high home prices going up. According to a report released Tuesday, prices in January were 19.1% higher than in the previous year. The level of growth was the highest in 45 years.

Frank Nothaft, chief economist at Core Logic, said that for-sale inventory was the lowest it had been in a generation.

The rise in mortgage rates eroded buyer affordability, and that price growth should slow in the coming months, but it depends on how long this drop in rates continues. There are other factors weighing on the mortgage market unrelated to the Ukraine crisis.

The yield on the U.S. 10-year Treasury fell to the lowest level since January. Markets are volatile because of Russia's invasion of Ukraine.

The pull-back in mortgage rates is caused by the move in Treasurys. Demand for mortgage-backed bonds is what governs mortgage rates. The bonds are often similar to the 10-year, but not always, and now is one of those times.

Depending on demand for refinancing, the duration of the MBS can vary. A 30-year fixed loan is very rare. The bond term doesn't last as long if people are selling their homes faster. Matthew Graham, chief operating officer of Mortgage News Daily, said that the current crop of MBS isn't expected to last more than five years.

Mortgage bonds have had a harder time keeping up with the 10-year because they behave more like the 5-year Treasury Note.

The Fed accounts for a larger percentage of total buying demand of new MBS, so the outlook for Fed bond buying is hurting them more than Treasuries.

There has been more demand for short-term debt, and so mortgage rates are keeping pace with the bond market. The answer depends on what happens in Ukraine and beyond.