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April mortgage rates forecast
Mortgage rates probably will rise in April, continuing this year's upward trend for interest rates of all kinds.
Prices are going up for everything, including interest, which is the price we pay for borrowing money. Consumer prices rose 7.9% in the 12 months ending in February, far above the Federal Reserve's goal of a 2% inflation rate.
Inflation causes mortgage rates to rise in two ways. First, lenders charge more for money so their profits aren't erased by higher prices. Second, the Federal Reserve tames inflation by raising interest rates.
The Fed's rate-setting Federal Open Market Committee meets eight times a year to discuss what's happening with the economy and whether an adjustment in interest rates is necessary. On March 16, the committee raised the federal funds rate — what banks charge each other for overnight loans to meet reserve requirements — to pull down on what it called "elevated" inflation.
That rate increase was by 0.25%, and the Fed is expected to follow up with additional increases. Mortgage rates tend to jump before the Fed raises short-term interest rates, and that's what's been happening since the beginning of the year.
It takes time for mortgage rates to peak in any given rate cycle. Right now we're in the "rising rates" period of the cycle. We don't know how long this period will last. But it's unlikely to end in April, which means mortgage rates will probably be higher at the end of the month than at the beginning.
What happened in March
The average rate on a 30-year mortgage rose about one percentage point in March, an unusually rapid climb that took a toll on buying power.
Rising mortgage rates affect home buyers along the price spectrum. For example, someone who can pay $1,100 a month in principal and interest (not including taxes and insurance) can afford to borrow $230,400 with a 4% interest rate. But when the rate rises to 5%, the same buyer can afford to borrow $204,900. That's a loss of $25,500 in buying power, simply because the interest rate jumped by one percentage point.
On the more expensive end of the spectrum, someone who can pay $6,000 a month in principal and interest loses $139,100 in buying power when the mortgage rate rises from 4% to 5%. The maximum loan amount drops from $1,256,800 to $1,117,700.
I predicted that mortgage rates were more likely to go up than down in March, and I blamed the Federal Reserve. The forecast proved accurate. The Federal Reserve raised the short-term federal funds rate in the middle of March. More increases in the federal funds rate are expected in the Fed's six remaining meetings this year.