If you’re in the market to purchase a new home this year, chances are you’re keeping a watchful eye on mortgage rates. Mortgage rates play a crucial role in determining what you can afford when securing a home loan. Given the current challenges in housing affordability, it’s a great time to take a broader look at the historical trajectory of mortgage rates and their connection to inflation, offering insights into where they might be headed in the coming months.
Providing Perspective on Rate Fluctuations Freddie Mac has been diligently tracking the 30-year fixed mortgage rate since April of 1971. Each week, they publish their Primary Mortgage Market Survey, which compiles mortgage application data from lenders across the nation. A quick glance at their data reveals an interesting trend:
Examining the right side of the graph, it becomes evident that mortgage rates have experienced a substantial uptick since the beginning of the previous year. However, even with this rise, today’s rates remain below the 52-year historical average. While this historical context is valuable, most homebuyers have grown accustomed to mortgage rates hovering between 3% and 5% over the past 15 years.
This familiarity with rates within that range helps explain why the recent surge in rates might have left many feeling a sense of sticker shock, despite rates still being near their long-term average. While many buyers have adapted to these elevated rates in the past year, a somewhat lower rate would be a welcome sight. To gauge the feasibility of such a scenario, it’s essential to delve into the realm of inflation.
Predicting Future Mortgage Rates Since early 2022, the Federal Reserve has been diligently working to combat inflation. This development is significant because, historically, there has been a consistent correlation between inflation and mortgage rates, as illustrated in the accompanying graph:
This graph vividly portrays the enduring relationship between inflation and mortgage rates. Looking at the left side of the graph, it’s evident that whenever inflation experiences significant movement (indicated in blue), mortgage rates closely follow suit (indicated in green).
Focus your attention on the circled section of the graph, highlighting the recent surge in inflation, with mortgage rates following suit shortly thereafter. However, as inflation has exhibited some moderation this year, mortgage rates have yet to mirror a similar decline.
Therefore, if history serves as a reliable guide, the market appears to be waiting for mortgage rates to react to the fluctuations in inflation and potentially trend downward. It’s important to note that accurately predicting the exact path of mortgage rates is an elusive endeavor, but the current trend of moderating inflation suggests that a decrease in mortgage rates in the near future aligns with a well-established pattern.