August Mortgage Rates Forecast: No Relief in Sight

Mortgage rates might not make a decisive downturn until inflation does, too.
Holden Lewis
By Holden Lewis 
Edited by Mary Makarushka

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August mortgage rates forecast

The economy is growing with surprising stamina, and inflation is sticking around. Those signs point to an increase in mortgage rates in August.

Interest rates stay up when the economy is expanding vigorously and inflation is high. Eventually the economy will cool off and the inflation rate will take an unmistakable turn toward the Federal Reserve's goal of 2%. But those economic indicators are unlikely to show up in August. Until they do, there won't be much to compel mortgage rates significantly lower.

In the meantime, markets are aware that the Fed might raise short-term interest rates this fall in the central bank's quest to yank the inflation rate back to that 2% goal. The possibility of another Fed rate hike might apply more upward pressure on mortgage rates in August.

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The economy isn't cooperating with the Fed

The overall U.S. economy grew at a 2.4% annual rate from April through June, according to the Bureau of Economic Analysis. That's a preliminary estimate, subject to revision. But if it holds up, it means that economic growth accelerated from the first three months of 2023 to the next three months.

Rapid economic growth is great if you're cheering for a strong economy and plenty of job creation. But the central bank is looking for a slowdown. The Fed expects a victory over inflation to require "below-trend growth and some softening of labor conditions," in the words of Fed Chair Jerome Powell, speaking at a news conference July 26 after the Fed raised short-term rates by a quarter of a percentage point.

As the economy demonstrates renewed strength, the inflation rate bounces around, showing no definitive direction. From December through May, annual inflation (in the Fed's preferred measurement — the core personal consumption expenditures price index) was confined to a range of 4.6% to 4.7%. In June, core PCE dropped to 4.1%. But is that a one-month fakeout? Fed officials will wait for the inflation rate to drop a few months in a row before they acknowledge that their rate hikes are getting the job done.

"Inflation has moderated somewhat since the middle of last year," Powell said. "Nonetheless, the process of getting inflation back down to 2% has a long way to go."

There you have it. "A long way to go" doesn't sound like an expectation of lower mortgage rates in August.

What other forecasters say

Housing economists have accepted the notion that mortgage rates won't drop significantly this year. Fannie Mae's chief economist, Doug Duncan, said in a July news release that he expects mortgage rates to "stay elevated" as the inflation rate resists falling in the rest of 2023.

In its July Housing and Mortgage Market Outlook, Freddie Mac said inflation will ease slowly "and the pressure on long-term rates, including mortgage rates, will not likely abate this year. Therefore, we expect mortgage rates to stay above 6% for the second half of 2023."

The National Association of Realtors adopted an optimistic tone in its economic forecast, updated July 27. Lawrence Yun, NAR's chief economist, said: "With consumer price inflation calming close to the Federal Reserve’s desired conditions, mortgage rates look to have topped out." Home buyers will rush into the market if mortgage rates decline meaningfully, he said.

What happened to mortgage rates in July

At the beginning of July, I predicted that mortgage rates would rise in advance of the Fed's rate hike. That's what happened. The 30-year fixed-rate mortgage averaged 6.88% through the first four weeks of July, up about one-eighth of a percentage point from June's average.

The average rate on the 15-year fixed rose nine basis points, and the average rate on the 5-year adjustable-rate mortgage (ARM) rose 14 basis points.