Why Home Mortgage Rates Are All Over the Place—and What They’re Expected To Do Next

Homebuyers, buckle up!

Lately, mortgage interest rates have been shooting up—and then falling back down—at a whiplash pace. Last month, rates surged, with some mortgage trackers reporting they briefly blew past 6%, before tumbling back down into the low- to mid-5% range. That’s a huge departure from a year ago, when rates hovered around 3% and there were no big swings from one week to the next.

Rates averaged 5.51% for 30-year fixed-rate loans in the week ending July 14, according to Freddie Mac. That’s up from the previous week when they averaged 5.3% but lower than the week before that when they were at 5.7%. (Freddie Mac’s rates are calculated differently from Mortgage News Daily. The latter reported rates had topped 6% in mid-June before tumbling.)

The ups and downs have been especially stressful for buyers who are also facing record-high home prices.

They’re quickly realizing that even incremental increases can inflate their monthly mortgage payments by more than they can afford. Higher rates have also meant that those who qualify for a mortgage one day might not be able to do so a day later.

“The doubling of mortgage rates since the turn of the year has really created a hardship for buyers who were counting on record-low mortgage rates to support the purchases of record high-priced homes,” says Keith Gumbinger, vice president at the mortgage information website HSH.com.

And with the U.S. Federal Reserve on a mission to tame inflation by hiking its own interest rates, potentially thrusting the nation into another recession, mortgage rates aren’t expected to settle down anytime soon.

“Over the next few months, volatility is likely to continue to be very high,” says Gumbinger. “Markets have not yet decided if the bigger threat is rising inflation or the threat of a recession.”

Why mortgage interest rates are so volatile now

There are some big forces at work in a tug of war over which direction mortgage rates will head next.

The one that’s grabbed most of the headlines is the U.S. Federal Reserve’s mission to raise its short-term interest rate to combat the high inflation wreaking havoc on the budgets of Americans. Mortgage interest rates, while different, tend to follow the same trajectory as the Fed’s rates.

“What seems to happen with every Fed increase is mortgage rates spike. And then they slip backward—but never as far as where they came from,” says national real estate appraiser Jonathan Miller. “It’s unlikely that mortgage rates three to four months from now will be as low as they are today.”

Mortgage lenders also have financial incentives for keeping rates high—especially now that many lenders are hurting. Fewer homeowners are seeking to refinance their existing loans because it doesn’t make as much financial sense as when rates were lower. That’s hurt business. Offering higher rates to new clients translates into more money for lenders.

In addition, the Fed has wound down its purchases of mortgage-backed securities, aka mortgage bonds, that it initiated during the COVID-19 pandemic to keep the economy strong. (Lenders typically bundle loans together and sell them to investors; they do so to get the loans off of their books and free up money they can use to make new mortgages.) When demand for mortgage bonds falls, prices go down—and mortgage rates rise.

Yet there are also opposing forces pushing mortgage rates downward.

And as the Fed continues to raise rates, fears of a recession are growing. Many worried investors are taking money out of the sagging stock market and putting them into what they consider safer investments: bonds, including mortgage bonds. That additional demand is helping to keep mortgage rates lower.

“I still expect mortgage rates to move toward 6%,” says Realtor.com® Senior Economist George Ratiu. “However a recession or fears of one can temper that.”

If the nation does succumb to a recession, mortgage rates are likely to fall again. The Fed typically lowers its own rates to stimulate the economy, and mortgage rates typically follow. That’s what happened during the pandemic when mortgage rates bottomed out in the previously unheard-of 2% range.

“Significantly lower mortgage rates would mean that the economy would be cooling significantly as well,” says HSH.com’s Gumbinger.

In his 35 years in the business, mortgage broker Rocke Andrews, of Lending Arizona in Tucson, has never before seen mortgage rates rise and fall so much, so fast.

“A lot of times, [rates have] been volatile, but all in one direction, more going up really fast or going down really fast,” he says. “Until there’s a clear direction of the economy slowing down or inflation slowing down, expect volatility.”


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