Housing Market Decoded: Can we predict where mortgage rates are headed?
A range of competing factors are driving volatility in rates, making it harder to forecast their direction — but they're likely to decline further this year.
Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.
In theory, lower mortgage rates should bring both more buyers and sellers into the housing market this fall.
But movements in rates — and consumers' reactions to those changes — have not always been operating as expected. Although rates are likely to come down in the fourth quarter, there is going to be some volatility week-to-week, which means the housing market could be in for a bumpy ride through the end of the year.
The numbers
In the middle of a global pandemic and as the Federal Reserve dropped the federal funds rate to near zero, the average rate on a 30-year fixed rate mortgage fell to its lowest level in history, bottoming out at 2.73% at the end of January 2021. As the Fed subsequently hiked short-term interest rates to battle rising inflation, mortgage rates ended up rising faster than at any other time in the past four decades.
Over the past two years, the average rate on a 30-year fixed-rate mortgage has ranged between about 6 and 7.79%. However, the relationship between mortgage rates and the federal funds rate has become less clear.
In early September, the Federal Reserve cut interest rates for the first time in more than four years … and mortgage rates increased.
The explanation
Mortgage rates had actually begun falling in early July, as the likelihood of a Fed rate cut became more assured. By the time the Fed met in early September, the effects of the cut to short-term interest rates was already baked into mortgage rates.
Instead of falling after the Fed meeting, average mortgage rates have climbed by nearly a quarter point. Last week, Freddie Mac reported that the average 30-year fixed-rate mortgage surged to 6.32%, up 20 basis points from a week earlier, the biggest one-week increase since April.
While there is a relationship between the short-term Federal funds rate and mortgages rate, there is a host of other factors that influence mortgage rates — and some of those factors are having opposing effects, which is leading to the weekly volatility in rates.
Labor market. Mortgage rates rose sharply on the heels of the better-than-expected September employment situation report. When the economy is strong, investors typically shift from safe assets, such as government bonds, to investments with higher returns. As demand for government bonds falls, bond prices drop and yields increase. Mortgage rates tend to closely track with yields on government bonds, which is a key reason mortgage rates increase when economic conditions are favorable.
Inflation. The September Consumer Price Index (CPI) report showed that the inflation rate edged down to 2.4%, the sixth consecutive month of lower inflation. When inflation falls, mortgage rates tend to fall, as well, because lenders can drop rates and still earn a positive return.
Mortgage demand. The price of a mortgage (i.e., the interest rate) can go down when demand is low and can go up when demand increases. As rates fell through July and August, the demand for new purchase mortgage applications hardly budged. However, there was a boost in mortgage applications in September. With more borrowers competing for mortgages, lenders have leverage to increase the interest rate without losing business.
Mortgage rates are likely going to bump around from week to week this fall, though it is still expected that rates will generally decline over the coming months. Most forecasts indicate that mortgage rates will remain above 6% through the end of this year.
However, nothing is assured in this unusual market. Continued stronger-than-expected job growth, a turnaround in inflation, or a surge in mortgage demand could lead to a shift in the mortgage rate trajectory.
Dr. Lisa Sturtevant has been involved in research on economic, demographic and housing market issues for more than 20 years. She is currently Chief Economist at Bright MLS, where she leads research and forecast activities for Bright and serves as a thought leader on the housing market. The views expressed in this column are solely those of the author.