Mortgage Interest Rates Forecast

Aug 12, 2022

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Mortgage rates today: Friday, August 12, 2022

On Friday, August 12, 2022, the average interest rate on a 30-year fixed-rate mortgage rose eight basis points to 5.267% APR. The average rate on a 15-year fixed-rate mortgage went up seven basis points to 4.524% APR, and the average rate on a 5-year adjustable-rate mortgage bumped up one basis point to 4.516% APR, according to rates provided to NerdWallet by Zillow. The 30-year fixed-rate mortgage is 25 basis points higher than one week ago and 235 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

Fixed mortgage rates took a plunge the week ending Aug. 4, and while mortgage rates rose across the board in the week ending Aug. 11, they did not reach their prior heights.

  • The 30-year fixed-rate mortgage averaged 5.23% APR, up eight basis points from the previous week's average.

  • The 15-year fixed-rate mortgage averaged 4.53% APR, up eight basis points from the previous week's average.

  • The five-year adjustable-rate mortgage averaged 4.52% APR, up eight basis points from the previous week's average.

After three weeks of falling rates for fixed-rate products, mortgage interest rates bumped upward this week. Though no one can say for certain if they'll continue to climb, if one were to ask a Magic 8 Ball whether rates will stay lower, it wouldn't feel surprising to see "Outlook not so good" burble up through that purply blue water.

That's because for everything positive happening in the U.S. economy, like inflation potentially beginning to moderate and the job outlook remaining strong, one way or another the Federal Reserve is going to keep putting pressure on interest rates. The rate of inflation is still well above the central bankers' 2% target, and all those jobs added in July could be interpreted as signs the economy is still running too hot. With three more Federal Reserve meetings scheduled for 2022, more increases to the federal funds rate are likely.

Changes to the funds rate may have only an indirect effect on mortgage interest rates, but another of the Fed's planned changes should have a direct impact. For two years beginning in March 2020, the Federal Reserve bought billions of dollars' worth of mortgage-backed securities — basically, bonds that are secured by bundled home loans — to help stabilize the housing market. These purchases helped push down interest rates and hold them at historically low levels.

Starting in June 2022, the Fed began letting go of some of these securities as they matured rather than reinvesting them. The bankers started out slowly, shedding $17.5 billion each month this summer. (They're working with an extraordinary amount of money, so yes, billions of dollars is "starting out slow.") But beginning in September, they'll double that number and let go of $35 billion each month.

Just as the MBS purchases helped hold mortgage rates down, taking them away could allow mortgage interest rates to float higher. It's not a sure thing, but it certainly feels like "Signs point to yes."

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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