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NAR: Expect Mortgage Rates to Go Higher

NAR’s chief economist says inflation is rising faster than expected, and the “Fed may be forced to raise interest rates even more aggressively than planned.”

WASHINGTON – Inflation rose to a 40-year high in June and is accelerating faster than expected. According to data from the Bureau of Labor Statistics’ Consumer Price Index, consumer prices jumped 9.1% last month and posted an annualized inflation rate of 17%, which is much higher than most economists predicted.

“The Fed may be forced to raise interest rates even more aggressively than planned – even with the rising possibility of a recession on the horizon,” says Lawrence Yun, chief economist for the National Association of Realtors® (NAR).

He says the mortgage market already factored its expected inflation levels into current mortgage rates, but it “may have to adjust a bit higher based on today’s uncomfortable inflation rate.”

That could be a major blow to aspiring homebuyers who have been watching mortgage rates climb. The 30-year fixed-rate mortgage averaged 5.51% this week, up from 2.88% just a year earlier, according to Freddie Mac. Meanwhile, home prices have risen 15% over the past year, and neither home values nor monthly mortgage payments are included in inflation numbers.

A new Forbes.com analysis finds that mortgage rates contributed more to higher monthly mortgage payments than rising home prices did. The analysis shows that the typical monthly payment increased up to 57% in the past 12 months. Higher mortgage rates alone accounted for $408 of the average $725 increase in payments; higher home prices accounted for $239. (The remaining balance came from higher mortgage rates that were applied to a higher principal.)

“The homeowners who locked in low interest rates the prior two years have fixed, non-rising monthly mortgage payments,” Yun says. That’s “a different story for renters. Rents rose by 6% from last year and are rising at a 10% annualized rate. Rents will continue to rise in the upcoming years.”

The Federal Reserve’s next meeting is slated for the end of July. Many economists predict the Fed will tighten its monetary policy further to control inflation. That could lead to another 75- or 100-basis point increase in the Fed’s short-term benchmark rate.

While the Fed’s benchmark rate does not directly impact mortgage rates, it does influence them. Yun said following the Fed’s last rate hike – its largest since 1994 – the buyer pool shrank as mortgage rates increased.

Source: National Association of Realtors® (NAR)

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