Mortgage Rates Spike, Sparking Fears They Could Hit 8% or Beyond This Year

It’s as if homebuyers don’t have it tough enough.

Mortgage interest rates spiked over the past week, fanning fears they could be heading even higher. Rates averaged 7.09% in the past week, making this the highest they’ve been since April 2002, according to Freddie Mac data. And unfortunately for homebuyers, there’s no way to know if rates have peaked—or just started climbing.

“Rates could rise,” says Freddie Mac’s Deputy Chief Economist Len Kiefer. “I do think they’ll probably crest and come back down into the 6% [range]. But there is a tremendous amount of uncertainty.”

Rates will likely go even higher, potentially as high as 8%, if the U.S. Federal Reserve continues to hike its short-term interest rates to push down inflation. Mortgage rates typically follow the same trajectory of the Fed’s rates. So if inflation is stickier than the Fed wants to see, it could raise its rates, causing mortgage rates to go up.

However, if the inflation data comes in showing that the Fed’s rate hikes are working, the Fed could pause its hikes. That would likely result in lower mortgage rates.

“Rates could be 8% this year, and they could also wind up at 6% or 5.75%. They could be both,” says David Stevens, CEO of Mountain Lake Consulting, which provides consulting services to the mortgage industry. “It just depends on [what] the economic data looks like and what the Fed says.”

Higher mortgage rates affect first-time homebuyers the most

The higher rates are hurting first-time homebuyers the most. They don’t have a home that’s appreciated in value over the past few years that they can sell and then use the proceeds to fund their next home purchase.

That differs from the experience of baby boomers and even older members of Generation X, who have traditionally owned their homes for a while. About half of all older boomers who purchased a home did so paying all cash, says Jessica Lautz, deputy chief economist at the National Association of Realtors®. Other repeat buyers are able to pay cash for a large portion of their next purchase.

“First-time homebuyers don’t have housing equity and are not able to place a large down payment or pay all cash for a home,” says Lautz. “We already know that first-time homebuyers have been hit by a housing affordability and inventory crisis, and this is only going to make it worse.”

Shmuel Shayowitz, president and chief lending officer of Approved Funding in River Edge, NJ, saw rates between 7.25% and 7.5% on Thursday morning. (Rates varied based on borrowers’ creditworthiness, debt, down payment size, and other factors.)

As a result of the rate increases, homebuying has slowed down. That’s partly because there are so few homes on the market—many existing homeowners don’t want to list their homes and then have to take out a new mortgage at a higher rate to purchase a different home. Most locked in very low rates during the COVID-19 pandemic.

Many buyers are also nervous about purchasing a home at today’s rates.

“They’re afraid to buy a house at a rate that high,” says Shayowitz. “They think the rate hike is much more costly than it is.”

Mortgage rates could be much worse

Freddie Mac’s Kiefer points out that while mortgage rates are uncomfortable for many buyers, they aren’t historically high.

Rates briefly peaked at over 18% in fall 1981. They bounced between 6% and 8% for much of the 1990s and into the early 2000s.

“It’s certainly not unprecedented,” he says of today’s rates. “It’s just been a generation since we’ve been in this interest rate environment.”

However, there’s a key difference this time around: Home prices were a lot lower the last time rates were at this level.

In 2002, the median home price nationally was about $150,000, says Bright MLS Chief Economist Lisa Sturtevant. Since then, the national home price has nearly tripled. In July, the median list price was $440,0000, according to the most recent Realtor.com® data.

“High mortgage rates will keep more buyers out of the market, but they also will continue to sideline sellers, contracting both sides of the market,” Sturtevant said in a statement.

Rates should be tumbling down

With inflation easing, the Fed might choose to keep rates steady at its upcoming meeting in September. That could put pressure on mortgage rates to fall.

“We should have hit the peak, and they should be coming down because inflation has eased. We need the Fed to get on board,” says NAR’s Lautz. She expects rates will fall to the low 6% range by year’s end.

“If the Fed pauses and doesn’t make a bunch of hawkish statements, then mortgage rates will come down,” says Stevens, of Mountain Lake Consulting.

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