Haunted by high prices and low inventory, the U.S. housing market can sometimes seem like a horror movie to potential homebuyers. Now there are fears that a villain has returned from the dead: the 7% mortgage rate.
After mortgage rates rose in March 2022, as the Federal Reserve undertook a series of interest rate hikes to tamp down inflation, the 30-year rate reached 8% in October 2023.
Mortgage rates began falling again last December, when they fell below 7% for the first time in four months. Forecasters suggested that the 7% rate was dead and gone, predicting that rates would fall below 6% by the end of 2024, but the 7% rate may still have life. U.S. economic growth is still proceeding at a stronger pace than expected and continues to keep overall interest rates and mortgage rates high.
But fear not: Rates will continue to fall in the second half of this year, economists tell MarketWatch.
Mortgage rates have risen in the past week after data indicated consumer and wholesale prices rose last month and the job market was thriving. As the Federal Reserve is expected to postpone interest rate cuts until the second half of the year, mortgage rates are rising again across the board.
According to some sources, 30 years old is already over 7%.
Mortgage lenders set their rates based on a number of factors, including the borrower’s credit score, loan-to-value ratio and other market factors. And that causes notable changes: Friday afternoon the 30-year mortgage rose to 7.14%, according to a Mortgage News Daily survey.
Freddie Mac, which bases its estimates on thousands of mortgage applications, said its data showed rates jumped 13 basis points to 6.77% as of Feb. 15. And the Mortgage Bankers Association, whose data comes with a delay of a week, indicated that last week the average contract rate for a 30-year mortgage was 6.87%, while the 30-year jumbo loan had already reached 7% .
“What’s happened right now is that there’s been some major data releases that people are eagerly referring to, including the CPI itself, and they’re concluding that the Fed will change the pace or timing at which it would cut interest.” rates,” Doug Duncan, chief economist at Fannie Mae, told MarketWatch in a phone interview Friday.
“This is an uncertainty in the market. But they are also ignoring the fact that consumer spending was very weak and a couple of other macro indicators were weaker,” she added. Retail sales fell to a 10-month low in January, and defaults on credit cards and auto loans are at their highest point in more than a decade. Consumer credit growth has slowed significantly.
The Intercontinental Exchange, which also tracks mortgage rates, noted that the 30-year rate has reached 6.87% in recent days. But “borrowers with lower credit scores, those taking cash-out refinances, and jumbo loan borrowers all see offers above 7% on average,” Andy Walden, vice president of corporate research strategy at ICE, told MarketWatch.
“As for why rates are rising, it’s simple: Market expectations meet the reality of recent economic reports,” Walden explained.
The strong economic data, which exceeded market expectations, has in turn “caused uncertainty in the market regarding the likelihood that the Fed will begin easing rates early this year,” he added.
Other factors that could push mortgage rates higher
Two other factors “remain” in the shadows, Lawrence Yun, chief economist of the National Association of Realtors, told MarketWatch.
This is the “massive issuance of government bonds to finance the large federal budget deficit,” Yun said. “It’s out of the control of the Federal Reserve, but absorbing that amount means there is a need to offer higher interest rates.”
And let’s not forget about a potential government shutdown in March, he added, “and the halt in government bond payments could also be in play.”
However, the 30-year as measured by Freddie Mac “is unlikely to reach 7%,” Yun said. “We will most likely see weekly rebounds, but I think the average rate will be closer to 6% by the end of the year.”
Rates will return below 6%, says Fannie Mae
The return of high mortgage rates is a thorn in the side of the real estate industry, as they will likely keep sales subdued in the spring homebuying season.
In 2023, home sales hit a 29-year low amid historic unaffordability. There were few homes for sale on the market, and buyers were dealing with mortgage rates of 8%. According to Redfin, the typical home in the United States cost about $402,300.
The current data is scaring people, one officer noted.
“Many of my clients pay close attention to what the Federal Reserve says,” Hal Bennett, a Bellevue, Wash.-based real estate agent at Redfin Premier, said in a note.
“Buyers and sellers stood on the sidelines in December when the Fed signaled it would lower interest rates three times next year, but now some have their feet on the ground as the Fed has indicated rate cuts could come sooner. later than expected,” he added.
Duncan and his team at Fannie Mae said they are still sticking to their forecast that the 30-year rate will fall below 6% by the end of the year. “I see no reason at this time to change that forecast,” Duncan said. The jump in rates “is a market reaction to short-term factors,” he added.
He also encouraged homebuyers to shop around for lower rates. “Lenders don’t make money unless they make you a loan,” Duncan said. “So you should go in knowing that they’re going to give you a loan, and if you make them compete, you’re going to get a better deal than if you just [go with] one.”
“I do it myself,” he added. “I’ve never taken a mortgage where I didn’t talk to at least three mortgages [lenders] and every time I got a better deal.