It feels like déjà vu. Mortgage rates are going up again. What gives? I thought they peaked.
Not so fast. The Fed warned us time and time again that this inflation fight wasn’t going to be easy. Or short.
And it appears they might be right, based on the latest economic reports released in the past week.
Simply put, the economy is too strong and inflation remains a major problem.
This explains why mortgage rates are headed back toward 7%!
Mortgage Rates Don’t Like Inflation
In early 2022, mortgage rates took off like a bottle rocket. The 30-year fixed averaged 3.22% during the first week of January, per Freddie Mac.
Rates then increased nearly every week of the year, hitting a staggering 7.08% in early November, before coming back down slightly.
The issue was (and is) inflation, which had spiraled out of control, forcing the Fed to begin aggressively raising its fed funds rate.
Long story short, the economy was overheated and prices were out of control. And only higher rates could potentially shrink the outsized money supply.
Concurrently, the Fed halted its purchases of mortgage-backed securities (MBS) and Treasuries, which was known as QE.
The absence of a huge buyer of MBS, coupled with a defensive appetite from remaining buyers, meant much higher mortgage rates.
No one could have imagined mortgage rates doubling in less than a year, but they did. It was the first time in history.
Consumer Prices Are Too Expensive and the Labor Market Too Strong
While we saw some mortgage rate relief over the past few months, thanks to some encouraging economic reports, they are going up again.
You can thank the latest Consumer Price Index (CPI), which came in higher than expected.
The graph above compares Freddie Mac’s 30-Year Fixed Rate Mortgage Average in the United States (source) and Sticky Price Consumer Price Index less Food and Energy, per the Federal Reserve Bank of Atlanta (source).
CPI measures inflation and the most recent report showed consumer prices up 6.4% on an annual basis in January, down slightly from 6.5% in December. It was higher than the 6.2% expected.
Meanwhile, core CPI, which excludes food and energy, increased 0.4% on a monthly basis.
A week earlier, we had a better-than-expected jobs report, which had already put pressure on mortgage rates.
In short, a bunch of “good economic news” rolled in at a time when the Fed is attempting to engineer a near-recession.
That’s not good for mortgage rates. Interest rates tend to come down when the economy is slowing.
But these reports aren’t showing the Fed that the economy is slowing down. If anything, they’ve shown the Fed needs to up the fight.
Why Mortgage Rates Saw a Period of Relief in Late 2022
Mortgage rates experienced a nice little rally from mid-November 2022 to early February 2023.
The driver was some positive CPI reports that showed inflation was slowing. It appeared as if the Fed was getting prices under control.
In fact, it seemed as if the worst was behind us, despite it only being a few months.
But in hindsight, it looks to have been a blip. Or at least not a trend, as I warned at the time. Perhaps it was foolish to think the fight would be so easy.
This is exactly what the Fed has been cautioning us about. Until they see their inflation fight truly won, they’re going to raise rates and keep them elevated.
For a real-world perspective, I just got back from the grocery store. I bought a loaf of basic bread, a bag of chips, and a non-organic tomato. The bill was $14.49.
A year ago, that may have set me back $8. So inflation is real and it’s hitting our wallets on a daily basis.
Until it stops, expect higher mortgage rates. How high remains to be seen.
Will Mortgage Rates Be Even Higher in 2023?
Many thought mortgage rates had peaked in 2022, myself included. But since then we’ve seen a slew of strong economic reports.
Both the CPI report and jobs report defied expectations. And this is doubly scary given the Fed’s aggressive engineering of late.
Even with much interest higher rates, employment remains strong and consumer prices continue to be elevated.
If we see more of these reports, the 30-year fixed could climb back above 7%, and possibly head toward 8%.
Either way, these developments strengthen the argument that mortgage rates will stay higher for longer.
It’s not a foregone conclusion though. These monthly reports are volatile and may reverse course at any time.
So mortgage rates do still have the potential to creep back to recent lows, and move even lower.
The takeaway is that the inflation fight is going to take longer than expected, as the Fed told us.
And that means more defensive pricing on mortgages, aka higher mortgage rates for longer.
Read more: Which month are mortgage rates lowest?