March 3, 2022: -Mortgage rates are sinking as markets contend with the ramifications of Russia’s attack on Ukraine, which means home prices are likely to continue surging.

The average rate on the popular 30-year fixed mortgage had increased close to a whole percentage point from the start of this year up until the previous Friday, when it hit 4.18%, according to Mortgage News Daily. It then decreases to 4.04% Monday and 3.9% on Tuesday. That is the most significant two-day drop since March 2020, the pandemic’s start.

This will give homebuyers more purchasing power as the historically busy spring season kicks off. It will keep record-high home prices continuing on their run higher. According to a report released on Tuesday by CoreLogic, prices in January were 19.1% higher year over year. That level of growth is the highest in 45 years when CoreLogic started tracking prices.

“In December and January, for-sale inventory continued to be the lowest we have seen in a generation,” said Frank Nothaft, chief economist at CoreLogic.

Nothaft further said that the rise in mortgage rates since January eroded buyer affordability and that price growth should be slowing down in the coming months, but it all depends on how long this drop in rates continues. Given the different factors weighing on the mortgage market unrelated to the Ukraine crisis, it could be brief.

Mortgage rates follow the yield of the U.S. 10-year Treasury, which on Tuesday decreased to the lowest level since January. Markets are experiencing volatility because Russia invades Ukraine.

The move-in Treasurys is causing the pullback in mortgage rates. But mortgage rates are governed more directly by the demand for mortgage-backed bonds. Those bonds often mimic the 10-year, and now is one of those not-always times.

Unlike Treasurys, MBS duration can vary depending on the demand for refinancing. A 30-year fixed loan rarely lasts 30 years. If people refinance or sell their homes faster, the bond term doesn’t last as long. Given higher rates now and more opportunity for refinancing, the current crop of MBS isn’t expected to last over five years, according to Matthew Graham, chief operating officer of Mortgage News Daily.

Over the past three months, 5-year Treasurys have increased 0.10% over 10-year Treasurys. Because mortgage bonds behave like the shorter-duration 5-year Treasury note, they’ve had a more challenging time keeping pace with the 10-year.

“The outlook for Fed bond buying is hurting MBS more than Treasuries because the Fed accounts for a larger percentage of total buying demand of new MBS,” Graham said. “So if the Fed leaves, MBS prices have to fall farther to attract buyers. Lower MBS prices, which is equal to higher rates, all other things being equal.”