Why are Mortgage Interest Rates Increasing?
According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage (FRM) was 3.11% at the end of December 2021. Interest rates on the 30-year FRM then rose substantially to 5.8% in June before dipping slightly and rising to 6.7% as of September 29, 2022.
Inflation rose 8.3% from August 2021 to August 2022, contributing significantly to high mortgage interest rates. As long as inflation is high, mortgage rates will follow suit. When the costs of goods and services go up, mortgage rates typically do the same.
The Federal Reserve also attempts to correct the economy during times of high inflation by raising baseline interest rates, which is the interest rate that the Federal Reserve charges to commercial banks when lending money. In September, the Fed raised its baseline interest rate by 0.75 basis points, making it the third time it made such a move in 2022. The Fed’s latest move only worked to push mortgage rates higher, but they claim that their hands were tied due to high inflationary pressure.
High federal interest rates directly affect mortgage rates. When banks pay higher interest on loans, they need to charge a higher mortgage rate to make money. This means that homebuyers are ultimately the ones who are paying for higher interest rates, not the banks.
“The federal reserve controls the prime rate, and the prime rate is basically the rate that banks borrow from one another. And as the cost of funds increases and they raise rates, rates that the consumer is going to get will be subsequently higher,” Mayer Dallal, managing director at digital mortgage lender MBANC, told Time.
Mortgage rates are also highly correlated to the 10-Year Treasury Bond yield, federally-issued government bonds with a 10-year lifespan. They provide the government with debt to fund various programs and priorities. The Federal Reserve’s baseline interest rate significantly influences the bond yield and increased from roughly 1.5% in October 2021 to 3.67% as of October 3, 2022. This means that the 10-year treasury bond yield is roughly 2.4 times higher today than it was a year ago. Mortgage rates are around 2.15 times higher today than they were at this time last year.
When Will Mortgage Interest Rates Fall?
Ultimately, inflation is the main factor keeping mortgage interest high, so until inflation eases, rates will remain elevated. Lawrence Yun, Chief Economist at the National Association of Realtors, said in a press release that “only when inflation calms down will we see mortgage rates begin to steady.”
It looks like mortgage interest rates could fall below 6.0% soon, but homebuyers shouldn’t expect rates to fall significantly in the near future. Fannie Mae’s September 2022 forecast predicts that mortgage rates will average 5.7% between October and December 2022 and remain between 5.5%-5.7% in 2023.
