Mortgage interest rates surge to new highs, experts expect slow decline
In the past 18 months, the Federal Reserve has been actively combating inflation by implementing 11 consecutive interest rate hikes since March 2022. As a result of these measures and other economic factors, mortgage rates have significantly increased. According to Freddie Mac, the average rate on 30-year mortgage loans has risen from under 4% to 7.23% as of today, marking the highest level since 2000. This surge poses a significant obstacle for prospective homebuyers compared to the sub-3% rates seen in 2020 and 2021.
While mortgage rates are subject to fluctuation, industry experts and groups suggest that rates have reached or are nearing their peak. They believe that rates going any higher would adversely affect crucial aspects of the economy. However, reaching the peak does not guarantee an immediate decrease. For rates to decline, inflation must slow down, investments in mortgage-backed securities should increase, and the Federal Reserve would need to ease its rate hikes.
The CME Group’s Fed Watch tool indicates that there is only an 18% probability of the Fed increasing its rate at the upcoming September meeting. The chances are slightly higher for the November meeting, although that is still a considerable time away, and circumstances may change.
CEO of a leading home equity lender suggests that unemployment needs to rise while inflation slows down. He anticipates an increase in unemployment before the end of the year due to consumer stress, which could lead to reduced purchasing and corporate pullbacks.
If these conditions are met, the Federal Reserve may ease its benchmark rate hikes, resulting in potential decreases in mortgage rates. Various organizations, including Realtor.com, Fannie Mae, the National Association of Realtors, and the Mortgage Bankers Association, expect a slight decline in mortgage rates by the end of the year. Predictions range from 6% to 6.7% on average.
However, this drop is not significant. For example, a 7.23% rate on a 30-year $400,000 loan currently translates to a monthly payment of approximately $2,723. At 6.7%, the payment decreases to $2,581, a difference of only $142.
In the meantime, securing a mortgage will be more expensive compared to previous years. Individuals who took advantage of the ultra-low rates are advised to carefully consider refinancing or selling their homes. Buying a new home during this period may require strategies to obtain a lower mortgage interest rate, such as purchasing points, negotiating a temporary buydown, or considering alternative mortgage products like a 15-year loan or adjustable-rate mortgage. VA loans and USDA loans may also offer lower rates, provided individuals meet the qualification criteria.
It is important to note that the market is expected to stabilize at a new norm within the next 12 to 18 months, which will likely not be below 3%. Experts emphasize that the economic stimulation following the global pandemic was responsible for the unique attribute of sub-3% rates.