Mortgage rates reach 20-year peak, may climb higher and persist for months.
Mortgage Rates Reach 21-Year High, Homebuyers Face Uphill Battle
Mortgage rates have recently shattered a 21-year record, leaving those hoping for a decline in rates disappointed. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage now stands at 7.09%, more than double the pre-interest rate hike average. Unfortunately, there’s more bad news for homebuyers as rates could potentially climb even higher.
Expert Predicts Rates Will Continue to Rise
Stephen O’Connor, a research professor of real estate at the George Washington University School of Business, believes that we haven’t reached the peak yet. In an interview with the Washington Examiner, he stated, “I don’t think we’re at the peak.”
The surge in rates has made homeownership unattainable for many households. In 2020, the median mortgage payment was just over $1,000 per month. Fast forward to today, and the typical single-family home now requires a staggering $2,234 per month, marking a shocking 116% increase in just three years.
The Fed’s Influence on Mortgage Rates
While the Federal Reserve doesn’t directly control mortgage rates, its changes to short-term rates do impact longer-term securities. As the Fed raises interest rates, mortgage rates tend to follow suit.
Uncertainty Surrounding Future Rate Hikes
Many investors anticipate that the Fed will pause its rate hikes at the upcoming September meeting. However, O’Connor disagrees, predicting another rate increase next month. He believes that Fed Chairman Jerome Powell remains focused on combating inflation, despite positive economic indicators in other areas.
O’Connor explained, “Are they done raising those rates? I don’t think so. I think Powell is still very much concerned with core inflation… there are other types of markers in the ether there that are raising concerns relative to wage inflation, things of that nature.”
Inflation and Economic Factors at Play
Consumer price index inflation currently stands at 3.2%, higher than the Fed’s 2% target. However, “core inflation,” which excludes volatile food and energy prices, has risen to 4.7% in the year ending in July.
O’Connor highlighted several sources of uncertainty that could influence the Fed’s decision-making. Mixed signals from economic gauges, along with unknown factors like the slowdown in China and the war in Ukraine, add complexity to the situation.
Unpredictability of Mortgage Rates
Jeff Ostrowski, an analyst at Bankrate, emphasized the difficulty in predicting mortgage rates in recent years. Economists did not anticipate rates dropping below 3% or rising as rapidly as they have.
Ostrowski explained, “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… the intensity and the speed of the increase has really caught everyone by surprise.”
He also noted that the 10-year Treasury yield closely mirrors mortgage rates. Over the past year, mortgage spreads, the gap between the 10-year Treasury and 30-year fixed-rate mortgages, have widened to three percentage points or more. The reasons behind this phenomenon remain unclear.
Long Road Ahead for Mortgage Rates
While there is hope that mortgage rates will gradually improve as the Fed begins to cut rates, O’Connor believes it will take time before rates return to pre-pandemic levels. Just before the pandemic hit, rates ranged from 3.5% to 4%, a far cry from the current 7.09%.
O’Connor concluded, “I don’t think that’s happening in the near-term at all… I just don’t see that happening.”
The Fed’s next meeting is scheduled for September 19 and 20. Most investors expect the Fed to pause, with a 90% probability of rates remaining steady, according to CME Group’s FedWatch tool.
Click here to read more from the Washington Examiner.
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