Mortgage rates rose this week, as concerns about inflation — and predictions for what the Federal Reserve might do about it — firmed up.
The average rate on a 30-year fixed-rate mortgage rose 11 points to 6.68% APR in the week ending Sept. 3, according to rates provided to NerdWallet by Zillow. (A basis point is one one-hundredth of a percentage point.) We calculate our weekly average using daily APRs recorded over the past five business days.
There are a few key drivers behind this week's increase. The Iran war is a big one. Hostilities flared over the weekend, with both sides breaking what had been weeks without strikes. Every time that conflict has escalated, fears of rising oil prices and intensifying inflation have sent bond yields higher. Mortgage rates are pegged to the yield on the 10-year Treasury note, so where yields go, rates go, too.
But mortgage rates were on the rise before any new fighting broke out overseas. Let's talk about why, what might move rates next, and what you should know about today's rates if you're considering a home purchase or refinance.
September Fed outlook shifts
Mortgage rates got a big push last Friday morning, when Federal Reserve Chair Kevin Warsh spoke at the Kansas City Fed's annual gathering in Jackson Hole, Wyoming. This was his first official speech in that role, and markets were hopeful he would use the platform to provide a bit more intel about his plans for federal monetary policy.
Traditionally, that's how chairs have used the Jackson Hole speech, but Warsh has made clear from day one that he's not keen on maintaining the status quo. Warsh's belief that the Fed should communicate less, including cutting out forward guidance from its post-meeting statements, has left markets desperate for any indication of what the central bankers' plans might be.
Warsh wasn't especially forthcoming in Jackson Hole, but he continued to be clear in his goal on inflation. "The Fed's price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target," he said on Friday. "It is the Fed's job to deliver stable prices."
That's nothing new from Warsh, but a point he made shortly afterward caught markets' attention: "Short-term interest rates are the predominant tool to achieve the dual mandate."
Let's unpack that. Changes to the federal funds rate, the key short-term borrowing rate that the Fed sets, ripple outward to all corners of the economy. The Federal Reserve's dual mandate is maximum employment and price stability — the latter meaning inflation's under control. Raising the funds rate is the Fed's main method for slowing inflation.
Like Swifties parsing lyrics to determine Taylor's true meaning, Fed watchers put these pieces together and decided a rate hike is coming this month. The odds of a 25-basis-point increase to the funds rate, which had been in the 30% range according to the CME Group's FedWatch tool, promptly doubled. They've since dropped slightly, as a couple of Fed governors indicated they might vote to hold the funds rate steady when the Fed meets Sept. 15-16. But there's still a much more significant chance of a September rate hike than there was before Warsh spoke.
Even though the Fed doesn't set mortgage rates, its decisions around the funds rate have tremendous influence. When it looks like a rate hike is on the horizon, mortgage lenders tend to start pricing that into their rates ahead of the Fed's actual decision. And bond yields' quick reaction to Warsh's speech (again, mortgage interest rates are benchmarked to the yield on the 10-year Treasury) had already prompted mortgage rates to leap higher on Friday.
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Labor market could complicate Fed's decision
Let's turn to the other side of the Federal Reserve's dual mandate, since this week we're getting new job market data. As we've now discussed at length, the Fed targets a 2% rate of inflation. Its other goal is maximum employment, which essentially means businesses can find employees and workers can find jobs.
Tomorrow morning, the Bureau of Labor Statistics will release the August Employment Situation Summary, better known as "the jobs report." The jobs report is always important data, but this one's especially significant because the last round of numbers was abysmal.
In July, the economy lost 23,000 jobs — 100,000 below economists' predicted increase of 83,000. May's and June's totals, which were both increases, got revised downward, too.
That places added emphasis on August, which could be evidence that July was a blip … or that it might have started a trend. If August's numbers are negative, that could force the Fed to consider a rate hike. While raising the funds rate is the central bankers' key tool for slowing inflation, cutting the funds rate allows the Fed to bolster a struggling labor market. The third option, holding the funds rate steady, could buy them more time to see how these dynamics play out.
If the odds of a September rate hike start to drop, that could relieve some of the upward pressure on mortgage rates. But bear in mind that there's still plenty to keep rates elevated, particularly the reignited Iran war.
Are 7% rates coming back?
Even if mortgage rates don't go higher, they're already in somewhat dicey territory. While our average from Zillow is in the high sixes, visiting various mortgage lenders' websites this morning to see what APR they're offering on 30-year, fixed-rate loans turned up a pretty wide range of rates.
The highest and lowest APRs I saw were roughly 65 basis points apart (more than half a percentage point!), and both included discount points. These units of prepaid interest add to closing costs but lower your interest rate, usually by 25 basis points per discount point.
Some lenders are already advertising rates that start with sevens — and those sample rates are often for a top-tier borrower, with excellent credit and a solid loan-to-value ratio, who's using points to buy down the rate. Prospective borrowers with less than stellar financial profiles are likely already getting quotes well into 7% territory.
You can't know if one rate is good without seeing another, and research from Freddie Mac has found that comparing even two quotes could save you up to $600 a year in interest. The moral of this story is: Whether you're considering a purchase or a refinance, you've got to shop around and compare quotes from multiple lenders to find the best rate.
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