Mortgage Interest Rates
Updated: Nov 3, 2022
Mortgage interest rates have recently been making waves in the housing market, with the rates more than doubling in less than a year's time. Many as of 10/27/22 project that they'll go up further, but opinions on the subject vary greatly. Here I wanted to share multiple projections by the experts, my opinion, and some of the influencing contributing factors involved.
Image courtesy Freddie Mac
Mortgage Rates 137.6% increase in under 1 year
On November 10th, 2021, average US 30 year mortgage interest rates as reported by Freddie Mac were 2.98%. As of 10/27/22, that number has risen to 7.08%, and appears to keep going up.
Mortgage Rates haven't been this high in over 2 decades, but rates have been much higher before
Why rates are up: The Inflation Factor
Rates have primarily been driven up by higher inflation than we've seen in a long time, with interest rate increases being one of the top ways that the government can curb inflation. Of course, not printing a lot of money is a bigger factor (think stimulus payments).
Target inflation rate:
"Since 2012, the U.S. Federal Reserve has targeted an inflation rate of 2% as measured by PCE. Keeping inflation low is one of the Federal Reserve's dual mandate objectives, along with stable and low unemployment levels (Investopedia)." See also the Federal Reserve's statement on the subject.
We're way off target, as you can see:
Image courtesy Trading Economics
In fact, we're higher now than we have been since the early 80's:
Image courtesy Trading Economics
Remember that interest rate image I shared earlier going back to the early 80's?
Image courtesy Freddie Mac
That's right! The last time we had that kind of inflation, we had much higher interest rates than we do now.
Why rates are up: The 10 year U.S. Treasury Note Yield
As published by MCT:
"Historically, the 10-year U.S. Treasury yield has been considered a key benchmark for mortgage rates. However, mortgage rates are not actually based on the 10-year U.S. Treasury note (as is commonly believed).
Fixed mortgage rates and Treasury yields generally move together. Why? As a fixed-rate asset, mortgage-backed securities (MBS) are in direct competition with Treasury instruments for investor money.
For mortgages to stay competitive in the eyes of investors, the rates on mortgages inherently follow changes in Treasury yields. Learn more about current rates for mortgage rates as well as the current and past 10-year treasury yield curve to see if following the movement of the 10-year Treasury yield will tell you the direction fixed mortgages rates will go."
We actually have predictions for that yield like we have for the 30 year mortgage rates, and they generally are projected to go in an upward trend from October, with none of the 3 projections I saw going down from October:
Image courtesy Statista
Image courtesy Financial Forecast Center
Image courtesy WorldGovernmentBonds.com
Will rates go down?
The answer to that question is "likely", but when that will happen is yet to be seen, but will likely occur when inflation is in a significantly better place than it is today, much closer to the 2% inflation target of the FED. I wouldn't be surprised if we didn't see anything like we saw less than a year ago for many years.
"NAR Chief Economist Lawrence Yun warned at the recent National Association of Real Estate Investors conference in Atlanta that mortgage rates could rise up to 8.5%." According to the same article, "Mortgage rates... just shy of 7%... could be a “new normal” after recent rapid increases in borrowing costs, says Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®."
See more details in my rate projections section.
What will happen when rates do go down?
When rates go back down, it will likely push prices up. Many people are waiting to buy until rates fall. They could be waiting for many years if they're looking for 3% rates. When they eventually fall, which isn't a guarantee any time in the near future, the affordability increase should drive demand, which should drive prices up.
In early 2022, one of the biggest factors driving up prices was multiple offer scenarios from homes in demand. Appraisal guarantees were sometimes used, where buyers agreed in advance, at time of offer, that they would pay the difference between the appraisal and the contract price, typically up to a certain cap. Appraisal guarantees were common in some cases, and I even had 1 scenario where a buyer's $60k guarantee was insufficient compared to another buyer's offer that had no cap on their guarantee. I also worked with a seller in a multiple offer scenario where we needed every penny of the appraisal guarantee from the buyer that gave us the highest above appraisal guarantee. When demand goes up, it will also lower inventory and make the market more competitive for buyers to win. Those with plenty of cash, able to afford appraisal guarantees and in some cases, make cash offers, will be in a better position than those with little capital reserves to spare. Sometimes in a hot market, like we recently had, offers weren't considered unless they had no home inspection included, elevating the risk for buyers without one. Those without it will need to, more likely, make multiple offers with more concessions before one sticks. Conversely, at the moment, you're less likely to need to make multiple offers on homes as long as you jump on showings/offers close to the time that a home hits the market. See more on my expeditious offers and expeditious showings section of my article on "Search Basics for Buyers."
Problems with Googling "where will mortgage rates go"
If you Google the term "where will mortgage rates go" here's what you find as of 10/27/22 at the very top, and this article has some similarities with some similar articles that diminishes accuracy and makes it harder for the reader:
Image courtesy Forbes