In the last few years we’ve seen historically low interest rates. But now, with our economy facing rising inflation, many are wondering, will mortgage rates continue to rise with inflation? Let’s take a look at the factors driving interest rates and hear from some industry experts to understand the effect of inflation and the future of mortgage rates.
What Is Going On With Rates?
According to Freddie Mac’s most recent data (June 16, 2022) mortgage rates are surging based on inflation expectations. Based on the Primary Mortgage Market Survey from Freddie Mac, the average 30-year fixed-rate mortgage has increased 5.8% and the average 15 year fixed-rate mortgage has moved up to 4.81.
In the last week alone, mortgage rates surged as the 30-year fixed-rate mortgage moved up more than half a percentage point, marking the largest one-week increase in the survey since 1987.
These higher rates are the result of a shift in expectations about inflation and the course of monetary policy. Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market.
At the end of 2021, Freddie Mac projected mortgage rates would average 3.6%-3.8% in 2022. As the chart below shows, rates have already surpassed those projections.
Sam Khater, Chief Economist at Freddie Mac, explained in a recent press release: “Mortgage rates across all loan types continued to move up. Rising inflation, escalating geopolitical uncertainty and the Federal Reserve’s actions are driving rates higher and weakening consumers’ purchasing power.”
The bump comes as the Federal Reserve moved to raise rates three-quarters of a percentage point on Wednesday, ramping up efforts to fight inflation, which has stubbornly remained high. In May, annual price increases clocked in at 8.6 percent.
What Does This Mean For Mortgage Rates Moving Forward?
So far this year, mortgage rates have looked like the only direction they’re heading is up, and would-be homebuyers are feeling the pinch. Activity in the housing market is showing signs of cooling, with mortgage applications down 76 percent from a year ago, according to weekly data from the Mortgage Bankers Association. Yet, home prices have shown no signs of noticeably slowing from the record highs in the first quarter of 2022.
Higher rates are creating all types of new affordability challenges. Affording a $316,000 home with mortgage rates 6 percent is the equivalent of paying for a $450,000 home with a 3 percent mortgage rate, according to an analysis from Ali Wolf, chief economist at Zonda, a housing market research platform.
According to Greg McBride, Chief financial analyst at Bankrate, “Inflation is out of control and until it peaks, neither will mortgage rates. The fresh 40-year high in the May Consumer Price Index and the surge in consumers’ inflation expectations has forced the Fed to act more aggressively and produced one of the biggest one-week spikes in bond yields and mortgage rates in decades.”
Greg Schwartz, CEO of mortgage lender Tomo adds, “Consumers haven’t seen mortgage rates above 6 percent since 2008. The pace of this move is what’s most concerning as consumers’ buying power evaporated quicker than any time in recent memory. Further, volatility in rates may not decrease anytime soon either.”
As rates rise, the refinancing boom of 2020 and 2021 is firmly in the rearview mirror. according to mortgage data firm Black Knight, rate-and-term refinancing activity dropped by 80% in the first quarter of 2022. The name of the game now for homeowners sitting on mounds of equity: cash-out refinances, which accounted for 75 percent of refinances in the first quarter.
And, In a recent realtor.com article, Danielle Hale, Chief Economist, realtor.com stated “As markets digest the Fed’s updated economic projections, I anticipate a continued increase in mortgage rates over the next several months.”
What Does This Mean for You if You’re Looking To Buy a Home?
The cost of lending is rising as mortgage rates continue to shoot up—and that will impact the bottom lines of homeowners and borrowers alike. Mortgage rates are more than two percentage points higher than at the start of the year, after registering the biggest quarterly climb in 28 years in the first quarter. So folks who are hoping for rates to fall may be waiting for a while.
With both mortgage rates and home values expected to increase throughout the year, it would be better to buy sooner rather than later if you’re able. That’s because it’ll cost you more the longer you wait. But, there is a possible silver lining to buying a home right now. While you’ll be paying a higher price and a higher mortgage rate than you would have last year, rising prices do have a long-term benefit once you buy.
If you purchase a home today valued at $400,000 and put 10% down, you would be taking out a $360,000 mortgage. According to mortgagecalculator.net, at a 5.5% fixed mortgage rate, your mortgage payment would be $2,044 a month (this does not include insurance, taxes, and other fees because those vary by location).
Now, let’s put that mortgage payment into a new perspective based on the substantial growth in equity that comes with the escalation in home prices. Every quarter, Pulsenomics surveys a panel of over 100 economists, investment strategists, and housing market analysts about their expectations for future home prices in the United States. According to Pulsenomics latest Home Price Expectation Survey survey reveals that the average of the experts’ forecasts calls for a 9% increase in home values in 2022.
Based on those projections, a $400,000 house you buy today could be valued at $436,000 by this time next year. If you break that down, that means the equity in your home would increase by $3,000 a month over that period. That’s greater than the estimated monthly payment above. Granted, the increase in your net worth is tied to the home, but it is one way to put the home price appreciation to use in a way that benefits you.
Bottom Line
Paying a higher price for a home and a higher mortgage rate can be a difficult pill to swallow. However, waiting will most likely cost you more. If you’re ready and able to buy a home, now will be a better time than a year, or even six months from now. Let’s connect to begin the process and get your rate locked in today.
