Mortgage rates climb as the US battles inflation

Mortgage rates continue to climb as the US fights to curb the effects of inflation. This week, the mortgage rate for a 30-year fixed-rate mortgage rose to 5.66%, up from 5.55% the week before. This is the highest since the end of June. It is startling that the mortgage rate was 2.87% just a year ago. The data released this week by Freddie Mac shows that inflation is taking its toll, and home buyers are feeling the brunt of it. 

“The market’s renewed perception of a more aggressive monetary policy stance has driven mortgage rates up to almost double what they were a year ago,” Sam Khater, Freddie Mac’s chief economist, said in the statement. “The increase in mortgage rates is coming at a particularly vulnerable time for the housing market as sellers are recalibrating their pricing due to lower purchase demand, likely resulting in continued price-growth deceleration.” 

Running the numbers on the current 30-year average on a $300 000 mortgage, the lender would pay $1734 per month, which is $451 more than the end of 2021. The latest mortgage rate increase could threaten to cool the housing market further, which has already seen a notable cooling off over the last few months. 

US inflation is currently hovering around 8.5%, and although there was some improvement in June and July, prices for most goods and services are near 40-year highs. Fed Chairman Jerome Powell noted that there is more to be done for them to feel confident that inflation is on the decline, “A single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” he said. “The economy will likely continue to soften, which could bring some pain to households and businesses.” 

The Fed's primary tool to control inflation is to increase the federal funds rate, which is the rate banks charge one another for overnight loans. During the pandemic, this rate went down to zero to lower the cost of borrowing money. It is possible we can see the federal funds rate move from its current rate of 2.5% as high as 4% to bring inflation back down to its target rate of about 2%. 

We should expect to see mortgage rates hovering between 5%-6% for the next few months; according to Realtor.com manager of economic research George Ratiu, “Homebuyers can expect mortgage rates to stay in the 5%-6% range over the next few months”.