Mortgage Interest Rates
Updated: Jun 14
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
To see a chart including ARMs, go here.
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
The Federal Funds Rate's Impact on Mortgage Rates & Projections from the Fed
It's quite rare in history for the federal funds rate to be above the average mortgage rates.
Image courtesy https://fred.stlouisfed.org/graph/?g=YPBJ
The projections for a reduced federal funds rate is published directly by the FED.
Image courtesy Federalreserve.gov
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
If you click on that article, you'll see that it was last updated today, but that's misleading.
Image courtesy Forbes
What I can see has been updated is the current mortgage rates. What doesn't appear updated is the forecasts that are mentioned which are the primary reason for looking at the article for many.
Here is the entirety of their section on forecast interest rates:
Image courtesy Forbes
You'll notice a few things missing from that which would be incredibly helpful. The number one thing missing is the date that each of those projections were made. The other main thing missing is hyperlinks to those sources. For instance, as of their October Housing Forecast, the 4th quarter forecast for Fannie Mae is 6.7%, not 5.7%. Likewise, in an October 21 publication of the National Association of Realtors, "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%."
Will Rates Go Down? Projections From Various Sources as of 10/27/22
Keep in mind that if you're looking at this article even a month after 10/27/22, it's a good idea to check the sources that I hyperlink below for an updated projection.
While I could easily be wrong, & I'm not even a loan officer or economist, I don't foresee mortgages getting anywhere close to 3% for at least 5 years, and even 10 years from now, or 20 years from now, it's possible that we still won't see 3%. I think that NAR's fears of interest rates potentially going to 8.5% are warranted, and that interest rates below even 6% may not come back for more than 3 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%." (article; Google Search terms I used to find it as the #2 option)
In Fannie Mae's May 2023 Housing Forecast, they believed that the rates are going back down:
MBA also has projections trending downward:
Image courtesy Mortgage Bankers Association from May 2023
The Mortgage Reports as of June 2023 projects that things will get lower in the next 90 days as of 6/14/23:
Image courtesy the Mortgage Reports
Word on the Housing Market
I recommend seeing my page on the local SE VA market if you're looking to sell or purchase in SE VA especially.
While markets vary substantially, the national Freddie Mac forecast is that house prices will only slightly decline by .2%, so when you sell will likely vary more by season than anything (for instance, in SE VA, June closings retain the highest values typically).
I can no longer afford what I wanted. What should I do?
If you can no longer afford what you wanted for purchase, I have a few suggestions:
Consider renting if you must move, but keep in mind that rates could keep going up, and rental prices will likely keep going up as well. You may rent for a year or 2, and find yourself in a worse situation than when you started. If renting, take Dave Ramsey's advice, and get something cheap, even if it means going below your typical standards that you would want in a longer term environment, using a low payment to leverage higher savings for your eventual purchase.
If you're in a home you own with a low rate, consider sticking around for longer. If more square footage is a must, consider an addition on your existing home, which may be better than a purchase.
Consider buying something that you plan to convert to a rental property, especially if you anticipate greatly increasing your income in the next 5 years. Keep in mind with rental properties the debt to income ratio and how that would impact your future purchase. Even a net positive cashflow rental property typically negatively impacts that DTI for a future purchase.
What all of this information as well as the housing market trends means for a sale
If you plan to sell a home, and make a purchase in cash, the mortgage information included here doesn't mean much, and the flat housing market doesn't mean much either. If you want to sell, go ahead based on personal preferences.
If you plan to sell a home, & make another purchase with a mortgage, if your market is anything like that in SE VA, & your rate is below 6%, I'd caution you to only do so if there are other factors, not just the market, causing you to offload the property. For instance, you may be moving to another state. You may be looking to downsize or upsize. If doing so, you may want to purchase a home that has an assumable mortgage if you can find one (it's not available with most homes, and when it is, prepare for a bidding war) and have the capital to pay for the difference in the purchase price and the amount owed on the loan. I should also say that if you plan to sell and then rent a home, you may find that rates are only worse in a year or 2 vs what they are now, & you could have had more equity in the home after a year or 2 if the market doesn't tank (& I don't think it will, at least not in SE VA).
If you plan to sell a home, & not make another home purchase, weigh the pros and cons of where you would be putting that money. If you own a rental property, are your current rates up to the market rates? Anyone looking at the stock market in the past year can tell you that the market in the past year has been relatively volatile. Many people have lost money, and some have cashed out of the market entirely. I cashed out for a time for a number of my stocks, and the fact that I have some stocks in today makes me still nervous about my future. I believe that a diverse portfolio of stocks and other investments is ideal, and for me, my cashflowing rental property with a 15 year loan and under 3% mortgage interest rate provides me a much stronger return than my stocks when I think about the money I'm receiving as cashflow and the principal I'm gaining every month which is significantly greater than that cashflow.
What all of this information as well as the housing market trends means for a purchase with no sale involved
If you're looking to buy with no sale involved and with no mortgage involved, there's no need to rush between now and January. The inventory tends to be low during this part of the season, but the prices tend to be low as well. It's not until January typically before the prices start picking up for the season, with January typically having a low for the Winter season from December contracts.
If you're looking to buy using a mortgage with no sale involved, I'd recommend buying sooner rather than later due to interest rates, with more increases likely in even the next month like there have been the past few months. A long period of looking for the perfect deal could cost you far more than you bargain for. I've been working with a number of buyers using mortgages over the past year who have been far too complacent about their home purchase, and if they knew then about what was going to happen, they would have been more aggressive. Analysis paralysis is something that I struggle with at times, but if it's something that you struggle with too, it could cost you big time when it comes to a home purchase in an environment like we're in now (10/27/22).
Back in December 2021 I published a video about how I believed that the prices were going to go up and the interest rates were going to as well. If only more people had watched and heeded my warning. I wasn't the only person saying it either, as I show in the video.
Another recommendation I have for purchases at the moment, if using a mortgage, is to weigh more heavily in your considerations mortgage possibilities available that:
1. allow for early rate locking
2. offer float downs in rates (in the rare event that they do go down)
3. offer "free refinances" in the future
In my wife & I's last purchase of new construction that closed in August of 2021, I knew that rates were projected to go up significantly (just not exactly when), so I spent around 1% or 2% of the purchase price for a 180-day lock. There was no guarantee that it would be worth it, and it ended up not even being needed because rates didn't skyrocket until starting in late December, around 4 months after our closing, but it gave us peace of mind that if they did go up, we'd be fine.
Some lenders actually allow unlimited free refinances. You'll still need to pay some fees to other parties in a refi, such as for an appraisal, title fees, & taxes, but you won't need to pay anything to be paid directly to the lender, which typically is a significant portion of the expense of a refinance. That way, no matter high rates go, if you still own your home when rates do go below where you purchase at, whether it's 5 years from now, 10 years from now, or 15 years from now, you'll be in a better position to cost-effectively refinance.
Recent Inflation Rates: