Mortgage rates may have peaked for now—here’s why
The bond market has sent its strongest signal yet that interest rates have peaked. For potential homebuyers, this means mortgage rates may finally be coming down.
Since peaking above 5% in October, the 10-year U.S. Treasury yield has fallen by roughly 40 basis points. The 10-year is a key barometer for consumer borrowing costs like mortgages.
According to Freddie Mac, average 30-year mortgage rates have fallen for two consecutive weeks to 7.5%. In late October, 30-year rates peaked at 7.79%, the highest in more than two decades.
According to David Payne, an economist at Kiplinger, “Mortgage rates should be coming down a few tenths of a percentage point” moving forward.
“Mortgage rates typically move with the 10-year Treasury note’s yield, but are higher now than what would be normal in relation to the Treasury yield,” he said.
In other words, mortgage rates remain elevated relative to Treasury yields, leaving room for a drop in the short term. However, this "relationship" largely depends on what the Fed does, or says, next.
All eyes on the central bank
Yields are falling in part because the Fed has signaled that it’s finished raising interest rates for now.
Chairman Jerome Powell told a conference last month that “financial conditions have tightened significantly in recent months,” reducing the need for additional rate hikes.
“Slowing economic growth globally suggests interest rates have limited upside, which is good news for bonds,” wrote Gary Quinzel, vice president of portfolio consulting at Wealth Enhancement Group, a Chicago-based wealth advisory.
“The question becomes how long interest rates will remain elevated,” he said, adding that a “shift to easing monetary policy [interest-rate cuts] seems likely in the not-too-distant future.”
The Fed is expected to keep rates steady at its December meeting, according to CME Group’s FedWatch Tool—a closely followed metric that uses futures trades to work out the odds of rate changes.
Mortgage rates have crippled the housing market
For households locked into 30-year mortgages, surging interest rates over the past year haven’t impacted their finances. But they did make them think twice about moving.
Potential buyers fear giving up their existing mortgage for a much higher one, so they’re putting off a new home purchase until they’re confident that rates will come down.
This so-called “golden handcuff effect” has crippled the housing market by reducing supply and jacking up prices.
With affordability declining, the housing market is in dire straits by almost every conceivable measure. Mortgage applications have plummeted, home sales have collapsed, and homebuilder confidence is at its lowest level this year.
Conditions are so hostile for homebuying that industry trade groups like the National Association of Home Builders, Mortgage Bankers Association, and National Association of Realtors have called on the Fed to signal its intent that it won’t raise rates any further.