Mortgage rates have been above 7 percent for the past two weeks, much to the dismay of many cash-strapped homebuyers. According to Mortgage News Daily, the average rate for a 30-year fixed-rate loan was 7.09 percent on Tuesday and dropped to 6.96 percent on Wednesday.
"In the last 30 days, we've seen a variety of rates from the low 6 percent to the low 7 percent," said Jason Lerner, production area manager at George Mason Mortgage in Towson, Maryland." This is very volatile.
In fact, it's a wild ride. Mortgage rates have gone through a process of rising, falling and rising again as investors try to guess the Fed's next move. The Fed has been steadily raising its own short-term interest rates in order to lower inflation by cooling the economy.
When the Fed raises its own rates, mortgage rates tend to follow suit. Fed officials have signaled that another rate hike, or two, is possible this year.
The results of the Fed's actions have been mixed.In June, inflation had fallen to an annualized rate of 3%. This good news caused mortgage rates to fall below 7% on Wednesday. But while that's a big improvement from 9.1% in June 2022, when inflation peaked, it's still above the Fed's 2% target. Other data, such as the recent jobs report, show the economy remains stronger than the Fed would like.
When a report shows that employers are still looking for workers, consumers are still spending, or inflation remains high, investors worry that the Fed will raise rates. As a result, mortgage rates rise in anticipation of another Fed rate hike.
"We should expect a lot of bumps in the road," said David Stevens, CEO of Mountain Lake Consulting, which advises the mortgage industry. He is also the former CEO of the Mortgage Bankers Association." Regardless of the economic news, we will see interest rates fluctuate.
Higher interest rates make it harder for homebuyers to afford homes, while also incentivizing many would-be sellers to stay put, thus exacerbating the housing shortage.
Even if mortgage rates fall below 7 percent, homebuyers should not expect rates to fall to the historic lows seen during the COVID-19 pandemic.
"One can never really predict the future, but I don't think mortgage rates are going to go back to the 3 percent range in my lifetime," Lawrence Yun, chief economist for the National Association of Realtors®, told CNBC.
Where will mortgage rates go next?
Real estate experts don't expect mortgage rates to stay this high forever.
By the end of this year, Realtor.com® expects rates to be around 6.1 percent, and Stevens believes that by the first few months of next year, rates will be back in the 5 to 6 percent range.
Once the Fed brings inflation down to its target, it should stop raising rates. The Fed is walking a tightrope, trying to cool the economy without causing more bank failures or pushing the country into a recession. If the economy slumps too much, the Fed may cut rates to stimulate the economy. That should bring down mortgage rates as well.
"Interest rates," Stevens says, "will never return to the peak they were at during the COVID pandemic, which was between 2 and 3 percent." But rates will normalize.
Lower mortgage rates could help alleviate the housing shortage and high prices.
Currently, many homeowners are reluctant to sell their homes. Most home sellers are also home buyers, and they don't want to give up their ultra-low mortgage rates to apply for another mortgage with a rate that could be more than double what it is now. Many are waiting for rates to come back down, at least in the 5 percent range, before listing their properties.
"There is very little incentive for existing homeowners with very low mortgage rates to decide to sell their property," said Danielle Hale, chief economist at Realtor.com. What's the result? What's the result?" There's nothing to buy and everything to buy is expensive."
So when a "turnkey" home in a desirable area comes on the market at a great price, it's a bit of a unicorn in today's market. Hordes of buyers usually swarm the market, and the intense competition raises the price of the home.
"As mortgage rates rise, you would expect property values to fall," says Roland Weedon, CEO of Essex Mortgage, which operates in 40 states across the U.S. and caters to first-time buyers and renters." But that hasn't happened due to a shortage of inventory.
Mortgage lender Lerner has found that borrowers are increasing their "comfort level" by raising their mortgage payments in order to meet their home-buying goals.
He has also seen homebuyers lower their down payment percentages. They use the remainder of the purchase price to pay off other debts so they have more money to make their monthly mortgage payments.
"The fact that we're back to this point," Hale said, "could drag down the real estate market in the coming months." We expect mortgage rates to eventually fall. This will require more progress on the inflation front.
Factors that determine mortgage rates.
