Bad news for mortgage professionals: not only are mortgage rates at their highest level in over two decades, they might not drop anytime soon.
Economists, analysts and executives expect mortgage rates will continue to rise this year, possibly touching the 8% mark in the coming weeks. And after reaching the peak, they may come down slightly, still hovering around 7% at least in the first half of 2024. That’s a stark contrast to what was expected at the end of 2022, when economists forecast rates to be roughly 5.5% at this point.
The last time mortgage rates reached the 8% level was in the early 2000s, when home prices were significantly lower. Rates at the 7% or 8% level could spur a reduction in home prices, but current inventory issues have limited this impact. Even with rates in the mid-7s, there are bidding wars in dozens of markets across the country.
Mortgage lenders and loan officers said they are navigating the challenging landscape by going “back to the basics,” which means offering 30-year fixed loans to borrowers with the expectation that they will be able to refinance down the road. It can be tricky — housing economists say there are significant uncertainties and rates may remain higher for longer
Due to their long terms, mortgage rates usually follow the 10-year treasury yields, which are surging. The 10-year Treasury started this week with an upward swing at 4.3%, a level last seen during the 2008 financial crisis. When asked why U.S. bond yields might continue to climb, economists all said it was simple: inflation.
All roads lead to Jackson Hole
The surge in bond yields reflects investors coming to terms with the news that the Fed’s monetary tightening hasn’t caused a sharp recession as expected and inflation may run hot for longer than expected, according to George Ratiu, the chief economist at Keeping Current Matters.
“These concerns mean that rate hikes are likely at the Fed’s remaining meetings this year,” Ratiu said.
More rate hikes are precisely what Molly Boesel, an economist for CoreLogic, is forecasting. According to Boesel, there’s a good chance the Fed will raise rates at least one more time this year–if not in its next meeting scheduled for September, shortly after.
“But here’s the main thing: whether they raise it one more time or not, they’re going to hold where the rates are until they see inflation come back down to 2%. And that’s expected to be sometime in mid-2024,” Boesel said.
Based on the current economic data, Melissa Cohn, regional vice president of William Raveis Mortgage, said that the Fed, which is meeting this week in Jackson Hole, is likely to raise rates one more time this year, even though “a couple of Fed mentors have hinted that maybe they need more than one rate hike.”
“At the beginning of the year, people were forecasting that the Fed could cut rates in the fourth quarter of this year. Here we are, heading into the fourth quarter of 2023 expecting more rate hikes, not any cuts,” Cohn said. “And even when they end their rate hike, they have no intention to cut rates anytime soon.”
Mortgage rates can hit 8%
What does it mean for mortgage rates? A group of economists believe the 30-year fixed rate can reach 8%. The last time it happened was in August 2000, according to Freddie Mac.
“I wouldn’t be surprised to see rates touch on 8% before they start to come down,” Cohn said. She added that mortgage rates will start to come down when the Fed starts to cut rates, “hopefully, by the middle of next year, but it could be the end of next year.”
Logan Mohtashami, lead analyst for HousingWire, agrees that mortgage rates can hit 8%. But it would require the U.S. economic data to stay firm.
“Short-term, as long as the economy outperforms, 8% is in the works. However, you can see the limits of mortgage rates now because the Fed has told us they believe their policy stance is restrictive. They don’t want to push the lever too much because one of their goals is to keep the Fed funds rate higher for longer,” Mohtashami said.
Boesel estimates mortgage rates will stay close to 7% this year. In December 2022, the Mortgage Bankers Association (MBA) expected the 30-year fixed rate to end this year at 5.2%. In August 2023, its latest forecast was for rates to end the year at 6.2%. Meanwhile, in August Fannie Mae expected mortgage rates to end 2023 at 6.7%.
Ratiu said rates will likely continue rising until the Fed signals that inflation is sustainably under control and stops pushing the federal funds rate higher. But the timing of that depends on myriad factors. And it is challenging to pin down given the surprising twists in the economy and real estate markets, which have “befuddled economists’ forecasts this year.”
“I expect upward pressure to continue underpinning mortgage rates for the next few months. Historically, rates tend to follow trends in inflation, with a lag of several months.”
The housing market
According to Ratiu, viewed from the perspective of the past 20 years, the current 30-year fixed mortgage has high watermark rates.
“We would have to go back to 2001 to find mortgage rates above 7.0%. However, when taking a longer timeframe for reference, mortgage rates averaged 7.8% over the 1971 – 2021 period. On the current trajectory, rates are reverting toward their long-term average.”
However, according to economists, home prices are high compared to historical levels this time, and high mortgage rates will have a limited effect on bringing them down.
Boesel said that lessening demand may ease home price pressures. “But then you have the lock-in effect of the current owners, who aren’t incentivized to sell because they don’t want to give up their low rates. So, that’s keeping supply down.”
“Normally, when rates are high, home prices come down. But that’s not happening, at least not to the extent it should in terms of correlations. Inventory remains thin. As a result, prices remain high,” Cohn said.
Altos Research shows that single-family inventory rose to 496,541 on August 18 from 492,140 on August 11. Inventory this past week last year was above 550,000 homes.
Some mortgage lenders and loan officers said that despite surging mortgage rates, home loan demand remains relatively robust. Potential homebuyers want to stop paying rent and life events — marriage, a baby, divorce, death, a new job — still happen as usual.
Others expect to refinance their loans in a few months at a lower rate. They feel that’s the right moment to buy a home since the market will become more competitive when rates go down next year.
Blake Bianchi, founder and CEO of Idaho-based lender Future Mortgage, noticed an uptick in borrower demand in recent weeks. According to Bianchi, Future Mortgage has been offering rates of around 6.9% to its clients.
“Last week was our highest application count so far this year,” Bianchi said. “You would think that with rates going into the highest all of a sudden, buyers would stall. But buyers are starting to realize that if this is the peak, as soon as rates start to decline, it’s more than likely that home prices will go up, and we will be back to multiple bidding.”
Eric Hagen and Jake Katsikas, mortgage companies analysts at BTIG, don’t anticipate “a lot more operational capacity or expense reduction would likely be necessary from most nonbank lenders” if mortgage rates get closer to 8%.
However, the analysts stated in a recent report, “Stock valuations could still soften with rates at that level, especially if it coincides with higher inflation metrics, which further pinch affordability.”
Max Slyusarchuk, CEO of A&D Mortgage, said that according to the non-QM lender’s internal analytics, rates over 6.25% are “cost prohibitive” for the general population and not a normal situation. However, with rates “from 6.25% to 8.5%, there will still be people who will bite.”
Andy Winkler, director of housing and infrastructure at The Bipartisan Policy Center, said those buying homes right now and hoping to refi next year might be in for disappointment.
“You also have to be prepared to pay those high rates for the time being,” Winkler said. “Most people now think that rates will stay pretty high next year unless there’s some other kind of unforeseen factor affecting the economy. There are always potential shocks.”