December Mortgage Rates May Seek Calm After Turbulent Year

Interest rates on fixed-rate mortgages could stabilize or even drift lower in December.
Holden Lewis
By Holden Lewis 
Edited by Mary Makarushka

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December mortgage rates forecast

Interest rates on fixed-rate mortgages could stabilize or even drift lower in December. Lower mortgage rates would be a welcome respite to conclude a tumultuous year in which rising rates strained people's ability to buy homes.

There's room for mortgage rates to move down because, by one measure, they've been unnaturally high most of 2022. When we say "by one measure," we're talking about the difference between the interest rates that home buyers pay on their mortgages compared with the interest rates that the federal government pays on its debts. Specifically, it's the gap between 30-year mortgage rates and the yield on 10-year Treasury notes — what economy geeks call the "primary mortgage spread."

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Why the primary mortgage spread widened

From 2009 until recently, the primary mortgage spread tended to be less than two percentage points. For example, at the beginning of December 2021, the difference, or spread, was 1.5 percentage points: The average rate on the 30-year mortgage was 2.97% and the yield on the 10-year Treasury was 1.47%.

That difference almost doubled in one year, to 2.8 percentage points, as borrowing costs for home buyers have gone up faster than borrowing costs for the federal government. Observers have been asking why. One explanation is that interest rates may go down within a few years, touching off a refinancing boom among borrowers stuck with mortgage rates north of 6%.

You may be wondering why the possibility of a refi boom in a few years would elevate rates today. The reason is that lenders expect a typical mortgage to last roughly 10 years before it's paid off, either when the home is sold or the loan is refinanced. So investors buy those mortgages with the expectation that the loans will endure for roughly 10 years.

But if mortgage rates fall substantially within four or five years, many of those mortgages will be refinanced. So they'll turn out to be four- or five-year investments, not 10-year investments. Lenders aren't eager to give mortgages to people who can be expected to refinance within a few years, and that reluctance translates into higher interest rates. As the Urban Institute put it in its latest market commentary, "investors are demanding a higher risk premium." (More economy geekspeak.)

Uncertainty at every turn

"But wait," you might say, "if lenders are worried that people will refinance when rates fall, why not keep rates as low as possible? That way, fewer borrowers will refinance someday." 

That's a reasonable question, but it assumes that lenders are confident in their economic forecasts. They aren't certain about anything, not even the future path of Federal Reserve monetary policy.

"The uncertainty about Fed policy, and hence the high volatility of interest rates is primarily responsible for the wide spreads," the Urban Institute theorized.

Even the central bank is uncertain about what it will do over the next year or two because it doesn't know how fast the inflation rate will fall in response to its interest rate increases. At some point, maybe as soon as this month, the Fed will dial back the ferocity with which it has been raising interest rates, Fed Chair Jerome Powell said in a speech on Nov. 30. As the central bank's path forward becomes more apparent, uncertainty about its policy will dissipate. Less uncertainty could lead — maybe — to lower mortgage rates.

It's also possible that mortgage rates could rise in December, especially if the Fed raises short-term rates more than expected in its Dec. 13 - 14 meeting and signals that its aggressive rate increases will continue. At this writing, most Fed watchers forecast a bump of half a percentage point.

What happened in November

The average rate on the 30-year mortgage alternated weeks in November: down the first week, then up the next, followed by a dramatic plunge, then up slightly the next week before falling again.

That volatile performance culminated in a monthly average of 6.83%. That was slightly lower than October's average of 6.94% but considerably higher than the November 2021 average of 3.03%.

Our November forecast noted that mortgage rates had risen from August through October and that "there's little reason for them to reverse course in November." But they did reverse course, big-time, after the Consumer Price Index for October was released, showing a decrease in inflation to 7.7% year-over-year. News of the slower-than-expected inflation rate was followed by a drop of more than half a percentage point in the 30-year mortgage rate.

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