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Dec. 2, 2021, 10:44 a.m. EST

Mortgage rates are stable — but the omicron variant could change that

By Jacob Passy

Fears surrounding the omicron variant of the virus that causes COVID-19 may have stoked volatility in the stock market, but mortgage rates have held steady.

The 30-year fixed-rate mortgage averaged 3.11% for the week ending Dec. 2, up one basis point from the previous week, Freddie Mac (OTC:FMCC) reported Thursday.

The 15-year fixed-rate mortgage, meanwhile, fell three basis points to an average of 2.39%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.49%, up two basis points from the previous week.

“The consistency of rates in the face of changes in the economy is primarily due to the evolution of the pandemic, which lingers and continues to pose uncertainty,” Freddie Mac chief economist Sam Khater said in the report.

Typically, mortgage rates will roughly follow the direction of long-term bond yields, particularly the 10-year Treasury note (XTUP:BX:TMUBMUSD10Y) . But this week that didn’t happen. Investors rushed to the safety of bonds in light of the market’s initial downturn and subsequent volatile streak in light of the emergence of the omicron variant of the virus that causes COVID-19. When demand for bonds rises, their yields drop.

At the same time though, Federal Reserve chairman Jerome Powell signaled that inflation was running hotter for longer than anticipated, indicating that we should ditch the word “transitory” when describing rising prices. As a result, he said that the central bank may stop its asset-purchasing stimulus program sooner than originally indicated.

Since the start of the pandemic, the Fed has been buying billions of dollars of assets to boost the economy. Those purchases have included mortgage-backed securities, which pumped a great deal of liquidity into the mortgage market. That liquidity allowed lenders to trim interest rates to the record lows seen earlier in the COVID-19 crisis — but without those funds, lenders will need to hike interest rates to make up the difference.

Realtor.com, for instance, expected that mortgage rates will increase to 3.6% by the end of 2022, said George Ratiu, the real-estate platform’s manager of economic research. He noted that the expected rise in rates will create “even more affordability challenges for first-time buyers.”

Of course, there’s still a major variable out there that could drastically affect the trajectory of interest rates: The omicron variant.

“Economic data continues to show struggles in the supply chain that indicate higher inflation may be more persistent than previously expected,” said Zillow (NAS:Z) (NAS:ZG) vice president of capital markets Paul Thomas. “The big wild card for markets — and mortgage rates — will be the impact the omicron variant may have on economic recovery.”

Link to MarketWatch's Slice.