How High Can Mortgage Rates Possibly Go?

How High Can Mortgage Rates Possibly Go?

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Higher mortgage interest rates have taken a battering ram to the housing market.

Since the start of the year, mortgage rates have more than doubled. They’ve blown past all expectations, nationally exceeding 7% by some estimates. The possibility that rates could continue to rise has struck fear into the hearts—and bank accounts—of many stressed-out homebuyers.

The simple, and dispiriting, math: Every time they tick up, fewer buyers can qualify for loans—and those that do often can afford to buy only much cheaper homes.

So how high could rates go? The answer depends largely on how the economy fares. If inflation persists, the U.S. Federal Reserve will keep raising its own interest rates and mortgage rates will likely follow suit, at least to a point. What investors do with their money as the stock market continues to falter and fears of a recession grow will also help to determine their trajectory.

“Forecasting mortgage rates is notoriously difficult,” says Ali Wolf, chief economist of building consultancy Zonda. “For example, most top economists thought mortgage rates would average about 4% this year versus the near 7% we are seeing today. Mortgage rates are driven by what investors believe the impact of Federal Reserve policy will be on the economy and inflation.”

While no one knows just what will happen with mortgage rates, most real estate experts do not expect rates to go up much from here. They were 7.12% for 30-year fixed-rate loans as of Friday afternoon, according to Mortgage News Daily.

Monthly mortgage payments are becoming prohibitively expensive

Record-low rates, in the mid-2% range, helped to turbocharge real estate in the early days of the COVID-19 pandemic. Those ultralow rates coupled with a severe shortage of properties for sale helped home prices soar to unheard-of heights. Homebuyers could pay more for a home if their monthly mortgage payments were manageable.

Now that calculation is reversing.

With rates at 7%, someone buying a home today will be faced with monthly mortgage payments that are about 50% more expensive than they were for buyers in January for 30-year fixed-rate loans—and that’s assuming a down payment of 20%.

Adding in the higher prices from today, buyers are paying nearly 75% more than those who purchased homes and locked in their payments at the start of the year.

Unfortunately, most folks have not seen salaries rising at anywhere near that amount. And that’s causing the pool of buyers to dry up. Homes are sitting on the market for longer, and there are fewer home sales. Prices are even dropping. Sellers are spooked as they’re being forced to slash prices and accept their homes likely won’t sell for as much as their neighbors received just a few months ago.

“Housing demand has already slowed in response to higher mortgage rates,” says Wolf. “If mortgage rates continue to rise much more, the housing market will seize up.

“This means resale listings will remain limited as existing homeowners choose to stay put,” adds Wolf. “This also means that home prices would need to drop to help drum up demand.”

What happens next will depend on which direction mortgage rates move next. Rates could, theoretically, just keep rising and rising, especially if inflation remains high and the Fed keeps raising its rates to combat it.

“There’s no limit,” says Len Kiefer, deputy chief economist at Freddie Mac. “It really depends on what happens with the overall economy.”

Rates haven’t been this high since 2007—15 years ago. They also haven’t risen this rapidly since 1981, when rates peaked at 18.6%.

“Certainly, we’ve been surprised at how high rates have gone,” says Joel Kan, an economist at the Mortgage Bankers Association, a national trade group. He had initially expected rates to be at about 5.5% around this time of year.

“There’s definitely an upside risk for the rest of the year. … But we’ve also seen the potential for rates to flatten out or even fall by the end of the year,” says Kan.

Will mortgage rates keep rising?

Kan expects mortgage rates to stay around 6.75% by early next year, maybe even decline a bit. He doesn’t anticipate any more big jumps.

Nancy Vanden Houten, lead economist at Oxford Economics, also expects rates will remain around where they are. She does not expect them to reach 8%.

The Fed will continue to raise rates over the short term, but that’s not going to last forever. Eventually, inflation will come down and the Fed won’t pursue such large rate hikes. If the nation goes into a recession as a result of its rate increases, the Fed will likely even lower its rates.

“There’s a case to be made that we’ve seen the worst of it,” Houten says. “It’s reasonable to assume that [the] economy is going to slow, inflation is going to come down, and the Fed will eventually begin cutting [its rates].”

However, when the stock market is volatile, which it is right now, more investors put their money in Treasury bonds and mortgage-backed securities, aka mortgage bonds. When there is more demand for mortgage bonds, prices increase and mortgage rates fall.

“Fears of a recession (and falling into a recession) are important for the mortgage market,” says Zonda’s Wolf. “Historically, when the risk of a recession heats up, investors change how they want to invest, and that change results in lower mortgage rates.”

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