Mortgage Interest Rates Forecast

Aug 5, 2022

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Mortgage rates today: Friday, August 5, 2022

On Friday, August 5, 2022, the average interest rate on a 30-year fixed-rate mortgage fell 18 basis points to 5.02% APR. The average rate on a 15-year fixed-rate mortgage dropped 28 basis points to 4.324% APR, and the average rate on a 5-year adjustable-rate mortgage shrank two basis points to 4.471% APR, according to rates provided to NerdWallet by Zillow. The 30-year fixed-rate mortgage is 16 basis points lower than one week ago and 221 basis points higher than one year ago. A basis point is one one-hundredth of one percent. Rates are expressed as an annual percentage rate, or APR.

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Mortgage rates this week

The Federal Reserve has muddled its message about the future course of interest rates. Consequently, mortgage rates headed in different directions in the week ending Aug. 4.

  • The 30-year fixed-rate mortgage averaged 5.15% APR, down 30 basis points from the previous week's average. It was the biggest week-to-week drop in NerdWallet's survey since the early days of the pandemic.

  • The 15-year fixed-rate mortgage averaged 4.45% APR, down 18 basis points from the previous week's average.

  • The 5-year adjustable-rate mortgage averaged 4.44% APR, up four basis points from the previous week's average.

At its meeting in the last week of July, the Fed's rate-setting committee raised the overnight federal funds rate by three-quarters of a percentage point. Even so, fixed mortgage rates went down after the central bank's meeting. The 30-year mortgage even dipped a smidge below 5% on Aug. 1, then bounced back in the following days.

Meanwhile, the average rate on the 5-year ARM was volatile but trended upward following the Fed's meeting.

The trajectory of mortgage rates could reflect confusion over the Federal Reserve's intentions. Is the central bank about to adopt a "dovish" posture of less aggressive interest-rate increases, or will it continue on a "hawkish" trajectory of raising short-term interest rates in big chunks?

Fed Chair Jerome Powell started off his post-meeting news conference on a hawkish note by saying, "My colleagues and I are strongly committed to bringing inflation back down, and we are moving expeditiously to do so." Whenever a reporter raised the possibility that the Fed might trigger a recession, Powell changed the subject to inflation.

A few observers attended to the plain meaning of Powell's message:

  • "I heard hawkish," Steve Liesman, CNBC's senior economics reporter, tweeted.

  • Julia Coronado, clinical associate professor of finance at the University of Texas, noted in a tweet that Powell kept the door open to an "unusually large" rate increase in September.

But Powell's meaning wasn't so clear to other observers, who perceived doves taking flight:

  • The Wall Street Journal reported that some bond traders heard "leeway in his remarks for a less aggressive series of rate hikes to follow."

  • Zillow's vice president of capital markets, Paul Thomas, said in a news release that Powell's comments "were interpreted by many investors as more dovish than prior communications."

The Fed seems to be trying to lure the doves back to the roost. Less than a week after the Fed meeting, the New York Times reported that "a chorus of Fed officials has since made clear that a lurch away from rate increases is not yet in the cards." Mortgage rates have moved modestly higher since the article was published.

August mortgage rates forecast

Mortgage rates will likely rise in August as the Federal Reserve continues to yank interest rates higher.

Jerome Powell has repeatedly said that the central bank's "overarching focus" right now is to slow inflation. The Fed applies the brakes on inflation by raising short-term interest rates. When the central bank tugs short-term rates higher, mortgage rates usually rise, too.

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In fact, the Fed has targeted mortgage rates specifically. During the depths of the pandemic, the central bank bought government and mortgage debt, pushing mortgage rates to record lows. Now, the Fed is gradually reducing those debt holdings, which is expected to force rates upward.

This so-called reduction of the Fed's balance sheet is just beginning. As Powell pointed out in a news conference on July 27, the shedding of these assets is still ramping up and will "go to full strength" in September. As that date approaches, mortgage rates will bear additional upward pressure.

Affordability in the balance

Home prices have been rising swiftly along with mortgage rates, a combination that demoralizes buyers because homes become less affordable. Look at what happened to affordability from January to June. When you take the median home resale price and average mortgage rate in both months, the monthly payment on a typical home bought in June was $774 higher than its counterpart in January (after a 5% down payment).

If there's any good news for home buyers, it's that prices aren't rising as fast as they once were. In June, the median resale price of an existing home was 13.4% higher than a year before, whereas, in February, the year-over-year price increase was 17.1%. Higher mortgage rates helped drive the price slowdown.

Rising mortgage rates have had an even deeper impact on the median price of new homes, which went up 7.4% in the 12 months ending in June, according to the U.S. Census Bureau. As recently as April and May, the year-over-year price increases had exceeded 20%. Again, the Fed's campaign of rate increases has changed the pace of home prices increases.

The Fed is determined

The bottom line is that house prices continue to rise, making it difficult for would-be buyers to find homes they can afford. But it's hard to dispute that the Federal Reserve is succeeding in slowing down runaway house prices. Eventually, in a roundabout way, the slowdown in home prices will be reflected in the overall inflation rate.

Is it necessary for the Fed to cause a recession to chop the inflation rate to its 2% goal? Powell danced around that question in his July 27 news conference. He said he's not the person who defines when a recession begins and ends, and he added, "our goal is to bring inflation down and have a so-called soft landing, by which I mean a landing that doesn't require … a really significant increase in unemployment."

But he also implied that he's willing to restrict the U.S. economy, including the strong job market, if that's what's necessary to bring inflation under control. If and when the Fed succeeds in cutting the inflation rate to 2%, mortgage rates could decline because mortgage rates respond to inflation expectations.

What happened in July

The average 30-year fixed mortgage rate fell slightly in July after having risen seven months in a row. It averaged 5.66% in June and 5.55% in July.

In my July forecast, I predicted that mortgage rates would go up, driven by high inflation and the Fed's efforts to control it. (This is the same reasoning behind the August forecast of higher mortgage rates.) But investors positioned themselves for a recession by buying bonds, which had the indirect effect of pushing down on mortgage rates. I've guessed correctly in eight of the past 12 months.

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