Inflation, Fed action set stage for higher mortgage rates
Mortgage rates have hovered near all-time lows for much of this year, even as inflation has increased sharply across much of the economy.
That could begin to change in the weeks to come, now that the Federal Reserve has signaled it could announce as early as next month plans to begin rolling back the measures it has taken to shore up the economy during the pandemic.
The Fed is widely expected to announce a timetable for reducing its monthly bond purchases at its next meeting in early November. Those bond purchases have helped keep mortgage rates at ultra-low levels for much of the last 18 months.
The yield on the 10-year Treasury note has risen steadily since the central bank’s last policy update in mid-september, reaching 1.64 per cent this week. Home loan rates, which tend to track moves in the 10-year Treasury yield, have also moved higher.
The average rate for a 30-year mortgage climbed to 3.09 per cent this week, the highest level since April, when it peaked at 3.18 per cent, according to Freddie Mac. A year ago, the rate averaged 2.8 per cent.
Signals from the Fed and signs that inflation remains pervasive set the stage for mortgage rates to move even higher in coming months, economists say.
“The biggest influence is that the Federal Reserve is poised to start dialing back their bond purchases as soon as next month,” said Greg Mcbride, chief financial analyst for Bankrate. “However, in the months ahead inflation will likely be the single biggest determinant of what happens with mortgage rates. Whether or not they go higher, and if so, how much higher.”
Mcbride expects that longterm mortgage rates will average between 3 per cent and 4 per cent over the next 12 months. That’s along the same lines as a forecast
this week by the Mortgage Bankers Association, which projects the average rate for a 30-year, fixed-rate mortgage to close out this year at 3.1 per cent and then rise to 4 per cent by the end of next year.
The National Association of Realtors also sees rates moving higher from here, reaching 3.5 per cent by mid-2022.
“The Fed will likely raise interest rates by the middle of next year,” Nadia Evangelou, a senior economist at the NAR, wrote in an inflation analysis last week. “When the Fed increases its interest rates, banks do, too. And when that happens, mortgage rates go up for borrowers.”
Last December, the Fed said that it would buy $120 billion a month in bonds until the economy had made “substantial progress” toward its goals of maximum employment and inflation that averages 2 per cent over time.
When the Fed increases its interest rates, banks do, too. And when that happens, mortgage rates go up for borrowers
Nadia Evangelou, senior economist, NAR