Homebuyers watching mortgage rates should buckle up—but they probably won’t enjoy this ride.
Mortgage interest rates were above 7% for the past two weeks—much to the dismay of many cash-strapped buyers. They averaged 7.09% on Tuesday before falling to 6.96% on Wednesday for 30-year fixed-rate loans, according to Mortgage News Daily.
“Within the last 30 days, we’ve seen everything from low 6% to low 7%,” says Jason Lerner, producing area manager at George Mason Mortgage in Towson, MD. “That’s exceptionally volatile.”
It has, in fact, been a wild ride. Mortgage interest rates have been up, down, and then up again as investors try to guess the Federal Reserve’s next move. The Fed has been steadily hiking its own short-term rate to bring down inflation by cooling the economy. When the Fed raises its own rates, mortgage rates have often followed. And Fed officials have indicated another rate increase—or two—is likely this year.
The results of the Fed’s actions have been mixed. Inflation has tumbled down to 3% annually in June. That bit of good news caused mortgage rates to fall below 7% on Wednesday. But while that’s a big improvement from when inflation was running at 9.1% during the peak in June 2022, it’s still higher than the Fed’s 2% goal. Other data, such as recent employment reports, shows the economy is still stronger than the Fed would prefer. When a report comes out that shows employers are still looking for workers, consumers are still spending, or inflation remains high, investors worry the Fed will raise rates. So mortgage rates rise in anticipation of another Fed increase.
“We should expect a lot of bumping around,” says David Stevens, CEO of Mountain Lake Consulting, which provides consulting services to the mortgage industry. He’s also the former CEO of the Mortgage Bankers Association. “Whatever the economic news is, we see rates swing.”
Higher rates have made it more challenging for buyers to afford homes and incentivized many would-be sellers to stay put instead, worsening the housing shortage. Even when mortgage rates do come down below 7%, buyers shouldn’t expect they will fall down to the record lows experienced during the COVID-19 pandemic. “One can never truly predict the future, but I don’t see mortgage rates returning back to the 3% range in the remainder of my lifetime,” Lawrence Yun, chief economist of the National Association of Realtors®, told CNBC.
Where will mortgage rates go next?
Real estate experts don’t expect mortgage rates to remain this high forever. By year’s end, Realtor.com® expects rates to be around 6.1%. Stevens believes rates will be back in the mid-5% to 6% range by the first few months of next year. Once the Fed wrangles inflation down to its target, it should stop raising rates. The Fed is walking a tightrope trying to cool the economy without causing additional bank failures or pushing the nation into a recession. If the economy slumps too much, the Fed will likely cut rates to stimulate it. That should bring mortgage rates down as well.
“Rates will never go back to where they were to the peak of the COVID pandemic, which was in the 2% to 3% range,” says Stevens. “But they will normalize.”
Lower mortgage rates could lead to more homes for sale
Lower mortgage rates could help ease the housing shortage—and high home prices.
Right now, many homeowners are reluctant to sell. Most sellers are also buyers who don’t want to give up their ultralow mortgage rates to take out another mortgage with a rate that’s likely more than double what they have now. Many are waiting for rates to come down, at least to the 5% range, before listing their properties.
“Existing homeowners with a very low mortgage rate [have] very little incentive to decide to sell,” says Danielle Hale, chief economist of Realtor.com. The result? “There’s nothing to buy, it’s expensive to buy what’s available to buy.” So when a move-in ready home in a desirable area is listed at a good price, it’s a bit of a unicorn in today’s market. Hordes of buyers typically descend, and that fierce competition bids up the price of the home.
“With an increase in mortgage rates, you’d expect a drop in property values,” says Roland Weedon, CEO of Essex Mortgage. Essex does business in 40 states, working primarily with first-time buyers and renters. “But because there’s such a shortage of inventory, that hasn’t happened.” Mortgage lender Lerner is seeing borrowers stretch their “comfort levels” with higher mortgage payments to make homeownership work.
He’s also seeing buyers offer lower down payments. They’re using the rest of the money that would have gone toward their home to pay down other debt, so they have more money available for monthly mortgage payments. “The fact that we’re back at this point again could be a drag on the housing market in the months ahead,” says Hale. “We do expect mortgage rates will eventually decline. It’s going to take some more progress on inflation.”
What determines mortgage rates
While rates are influenced by the Fed’s rates, and often move in the same direction, they’re more tied to what’s happening in the bond market. After a mortgage is made, lenders will typically bundle it up with other loans into a mortgage-backed security, aka mortgage bonds. Then those are sold to investors on what’s called the secondary mortgage market. This gets the mortgage off of a lender’s books, freeing up more money to make new loans.
If investors believe the Fed is likely to keep hiking rates, they’re often reluctant to purchase mortgage bonds. One reason is they assume that the borrowers of those mortgages are likely to refinance those loans once rates fall again. There are also more mortgage bonds on the market for investors to choose from as a result of the bank failures. The FDIC is selling the portfolios of Silicon Valley Bank and Signature Bank. This makes these bonds less valuable.
As mortgage rates are the inverse of bond prices, when bond prices are down, mortgage rates go up. “Going forward, we can expect rates to continue paying a tremendous amount of attention to incoming economic data,” says Matthew Graham, chief operating officer at Mortgage News Daily. “Traders are on the edge of their seats, waiting for evidence that the economy and inflation are finally cooling off in a meaningful way. … When it happens, we should see a reasonably swift move back toward more livable rates.”