Mortgage rates recently broke a 21-year record, and those hoping for notable declines will likely have to do some waiting.
As of this week, the average rate on a 30-year fixed-rate mortgage was 7.09%, more than double the average before the Federal Reserve started raising interest rates, according to Freddie Mac. The last time rates were this high was March 2002 — and the bad news for homebuyers is they could push even higher.
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“I don’t think we’re at the peak,” Stephen O’Connor, research professor of real estate at the George Washington University School of Business, told the Washington Examiner.
The run-up in rates has made put home purchases out of reach for many households. Median mortgage payments hovered at just over $1,000 per month in 2020, according to the National Association of Realtors. Now the mortgage payment for a typical single-family home clocks in at $2,234. That is a shocking 116% increase in just about three years.
The Fed has been hiking its interest rate target (which is a different, very short-term rate) since March 2022. While the Fed itself doesn’t directly control mortgage rates, the central bank’s changes to short-term rates do put upward pressure on yields on longer-term securities. So when the Fed raises interest rates, mortgage rates tend to go up.
Many investors expect the Fed to pause hiking at its meeting in September, although O’Connor said he thinks there will be another rate increase next month. He said looking at the notes from past Fed meetings shows central bank officials are still quite torn on what to do, Fed Chairman Jerome Powell is laser-focused on bringing down inflation.
“Are the done raising those rates? I don’t think so. I think Powell is still very much concerned with core inflation and even though a lot of the other metrics look good relative to the number of jobs, unemployment rate, things of that nature, there are other types of markers in the ether there that are raising concerns relative to wage inflation, things of that nature,” he said.
Inflation as gauged by the consumer price index is now running at 3.2%, still higher than the Fed’s 2% goal, but notably lower than even just a few months ago. But “core inflation,” which strips out volatile food and energy prices, rose to 4.7% in the year ending in July.
O’Connor noted several sources of uncertainty that could influence the Fed’s decision-making. Not only are there mixed signals from various economic gauges, but there are also unknown factors like the ongoing slowdown in China and the war in Ukraine.
The coming inflation and jobs reports will be crucial for the Fed in weighing whether to hike rates again by a quarter percentage point at its September meeting.
Jeff Ostrowski, an analyst at the personal finance company Bankrate, pointed out that mortgage rates have been difficult to predict over the past few years. He said economists didn’t envision them getting down below 3% and also didn’t expect them to have risen as quickly as they have.
“It made sense that mortgage rates fell when the Fed cut interest rates to zero and it made sense that they were going to rise when the Fed started tightening, but it’s I think just the intensity and the speed of the increase has really caught everyone by surprise,” he told the Washington Examiner.
Ostrowski pointed out that the 10-year Treasury yield is the closest proxy to mortgage rates. The past year has seen an increase in mortgage spreads — that is, the gap between the 10-year Treasury and 30-year fixed-rate mortgages.
That spread usually hovers at about 2 percentage points, but those spreads have widened to three percentage points or even more, according to Ostrowski, who said economists haven’t been able to figure out exactly why that is happening or when it’s going to turn around. He said that many housing economists think that when spreads get back to normal, it will chop a percentage point or so off mortgage rates without anything else happening.
“And that’s true, but it’s kind of like there is no way to know when spreads are going to go back to normal,” Ostrowski said.
The situation with mortgage rates might gradually improve as the Fed begins to start cutting rates, but O’Connor said he thinks it will be a while off before mortgage rates start to fall back in line with pre-pandemic trends. Just before the pandemic took hold mortgage rates were clocking in at between 3.5% and 4%.
“I don’t think that’s happening in the near-term at all. I don’t think that’s happening by the end of next year in terms of a [1%, 2%, 1.5%] cut in the mortgage interest rates,” O’Connor said. “I just don’t see that happening.”
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The Fed’s next meeting is scheduled for Sept. 19 and 20. The central bank’s current interest rate target is 5.25% to 5.50%, the highest it has been since the dot-com bubble at the turn of the 21st Century.
Most investors expect the Fed to pause next month, with about 9 in 10 thinking that the Fed will hold rates steady, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
