How high can mortgage rates go? Likely higher

The days of record-low mortgage rates are fading into the rearview mirror. But how high they could still go remains uncertain.

Last week, the average rate on the popular 30-year fixed mortgage jumped to 5.81%, up from 5.78% the week prior, according to Freddie Mac. Since the start of the year, rates jumped more than 2.5 percentage points.

The rapid climb has sidelined homebuyers and rate-locked homeowners who are unwilling to give up their current ultra-low rate and trade up. Economists, too, are rejiggering their forecasts after the spike in rates, shifting their predictions for this year yet again.

“We’re reassessing where we think rates will go,” Len Kiefer, deputy chief economist for Freddie Mac, told Yahoo Money. “There’s no doubt there's a lot of volatility. The upward pressure on rates came very suddenly in the marketplace, and some of the biggest jumps we’ve seen in 40 years or so. Where that lands is really going to depend on a lot of expectations.”

Black swans this year — from an unrelenting rise in inflation to surging oil prices from the unexpected war in Ukraine — rippled through the economy and didn’t spare the housing market. The mercurial elements have left industry experts divided on where rates will still go this year.

One consensus among economists: Rates will continue to climb.

“It’s very challenging,” Kiefer said. “We have to look at what to expect over the next six to 12 months and what the markets and policymakers do.”

With inflation running at 40-year highs, the Federal Reserve recently increased its short-term benchmark interest rate by three-quarters of a point two weeks ago. It also signaled increasing the rate by 1.75 percentage points over the four remaining meetings scheduled this year.

The effects have cut across the housing market, Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors, told Yahoo Money. Market investors moved in anticipation of most Fed hikes, which caused mortgage rates to jump aggressively within the last six months.

“We expect mortgage rates to continue to rise in 2022, but I don't expect to see the same sharp increases that the market experienced in March and April,” Evangelou said. “For June, I anticipate the average at 5.5% and likely to see the 6% rate in the month of July. By the end of 2022, the average rate should average 5.8% to 5.9% for the year.”

At the start of the year, Fannie Mae forecasted rates would reach a high of 3.3% by year end. Meanwhile, the Mortgage Bankers Association was more aggressive, predicting that rates would hit 4% by the end of 2022.

Rates, so far, have raced past those predictions.

“Rates have surged in recent weeks,” Evangelou said. “Although we use Freddie Mac as the benchmark rate, we’re already seeing rates at 6% in some areas. However, we need to keep in mind that inflation will start slowing sometime in the second half of the year, causing rates to increase at a slower pace.”

Although some economists predict interest rates will continue to balloon, Joel Kan, associate vice president for the MBA, believes they could retract with time.

“Given our forecast of 5.1% to 5.2% for mid-year and we’re up to 6% now, there may be some near-term upside risk to rates,” Kan told Yahoo Money. “We’re seeing a lot of volatility in rates in a span of weeks and last month, but it can go back. We’re in a period of high, remarkable volatility that will calm down a little bit once we have a clearer picture of the Fed balance sheet runoff. It might settle to that 5% range.”

Where rates go have real consequences for homebuyers, especially those with tight budgets. According to NAR, at current rates, homebuying costs about $800 more every month since the start of the year.

“It hurts affordability,” Evangelou said, “especially for middle-income home buyers that can afford to buy fewer homes.”

Although home inventory had increased 13% compared to January, double-digit home price growth and rising rates have priced out large swaths of first-time buyers. According to an NAR analysis, buyers earning $75,000 can currently afford about 25,000 fewer listings now compared with January. While there are nearly 20,000 more homes available for buyers earning $200,000, there just aren’t enough entry-level homes available.

Even higher rates — that at least one economist is bracing for — would make that math worse for buyers.

“I think by the end of the year — this is purely my personal opinion, putting my thumb out into the wind — don't be surprised to see 6.5% and to hedge myself 6.5-7%,” Jim Gaines, research economist at Texas A&M’s Real Estate Center, told Yahoo Money.

But, he added, “the Fed and the government historically want to encourage homeownership. They really don't want the mortgage rate to get that high that it will be a detriment to the market.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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