You feel like you’ve been there before. The mortgage rates have risen again. What’s the deal? What happened?Not so fast. The Fed has warned us repeatedly that the fight against inflation would not be easy. Or short.The latest economic reports published in the last week suggest that they may be right.The economy is simply too strong, and inflation continues to be a major issue.Here’s why mortgage rates are heading back to 7%!
Mortgage rates don’t like inflation
In the first half of 2022, rates for mortgages soared like a rocket. Freddie Mac reported that the 30-year fixed rate averaged 3.22% in the first week of January.The rates then rose nearly every week, reaching a staggering 7.08 % in early November before easing back slightly.The Fed began aggressively increasing its Fed Funds Rate.The economy was out of control and the prices were uncontrollable. Only higher interest rates can shrink the overly large money supply.The Fed also ceased its purchase of Mortgage-Backed Securities (MBS) as well as Treasuries. This was called QE.Mortgage rates were much higher due to the absence of a large buyer of MBS and a defensive attitude from buyers who remained.Nobody could have predicted that mortgage rates would double in less than one year. But they did. This was the first ever time.
The consumer price is too high and the labor market is too strong
Despite some relief in mortgage rates over the last few months due to encouraging economic reports they are now going up.The Consumer Price Index ( CPI) was higher than expected.The graph below compares Freddie Mac 30-Year Fixed-Rate Mortgage Average in the United States, ( source ), and Sticky Price Consumer Price Index minus Food and Energy ( Source ), as reported by the Federal Reserve Bank of Atlanta.CPI is a measure of inflation. The most recent report shows that consumer prices rose 6.4% annually in January, down from 6.5% in the previous report. It was higher than expected.The core CPI (excluding food and energy) increased by 0.4% monthly.had a better than expected job report . This had already pushed mortgage rates up.The Fed has been trying to create a recession, and a lot of “good news” is coming in.This is not good news for mortgage rates. When the economy slows, interest rates tend to fall.These reports don’t show the Fed the economy is slowing. They’ve actually shown that the Fed must step up its fight.
Why Mortgage Rates Were Reduced in 2022
From mid-November to early February, mortgage rates saw a small rise.Positive CPI reports showed that inflation was slowing. It seemed as if prices were under control by the Fed.It seemed that the worst of it was over, even though it had only been a few short months.In retrospect, it appears to have been just a minor blip. As I said at the time, it was not a trend. It was perhaps foolish to expect the fight to be so simple.The Fed has warned us of this very thing. They will raise rates until they are confident that their fight against inflation is won.Just got back from the supermarket. I bought a basic loaf of bread, a bag or chips and a nonorganic tomato. The total was $14.49.This would have cost me $8 a year ago. Inflation is real, and it hits our wallets every day.Expect higher mortgage rates until it stops. It remains to be determined how high the rates will go.
What will the mortgage rates be in 2023?
I was one of those who thought that mortgage rates would peak in 2022. Since then, we’ve had a number of positive economic reports.The CPI and the jobs reports both exceeded expectations. This is especially scary in light of the Fed’s recent aggressive engineering.Even though interest rates are high, consumer prices and employment remain strong.If more reports like this are published, we could see the 30-year fixed rate climb above 7% and even possibly reach 8%.These developments, in either case, strengthen the argument that rates on mortgages will remain higher for longer.But it’s not an inevitable conclusion. These monthly reports can change direction at any moment.Mortgage rates have the potential to move lower and even return to their recent lows.As the Fed has told us, the fight against inflation will take longer than anticipated.This means higher mortgage rates over a longer period of time, and more defensive pricing.