How mortgage rates got to highest level in 23 years

America’s most popular home loan, the 30-year-fixed mortgage rate, has continued to climb up in recent months, reaching a peak of 7.49 percent on October 5, according to the latest data made available by the St. Louis Federal Reserve.

It’s even higher than the 7.31 percent reached in the week ending on September 28, the highest level in nearly 23 years. It’s also bad news for aspiring homeowners who have been squeezed out of the market by a combination of skyrocketing home prices, low inventory, and suddenly higher mortgage rates last year.

Despite a correction of the housing market which began last summer and brought prices down in many areas of the country, offering relief in the most overvalued metros, mortgage rates have remained high, complicating people’s efforts to buy a property.

But how did mortgage rates reach a level unseen since the year 2000?

An Unpopular Side Effect

Melissa Cohn, regional vice president at William Raveis Mortgage, told Newsweek that there’s one main single factor we can point the finger at: inflation.

“When the rate of inflation skyrocketed after the pandemic, the Federal Reserve started to raise its funds rate with the goal of bringing the rate of inflation back down to 2 percent,” she explained, referring to the central bank’s ideal target of inflation.

“Inflation has been stubbornly high and as a result the Fed has hiked rates 11 times in the past 18 months which has in turn brought mortgage rates to their current high levels,” Cohn added.

“In order to curb inflation, the government is attempting to slow down the housing market to cut down on home sellers’ abilities to acquire large sums of money quickly, and slow the overall cost of living,” Rhett Wiseman, a real estate private investor and the founder of Wiseman Advising LLC/Section8Coaching.com, told Newsweek.

Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors (NAR), told Newsweek that in addition to the “super aggressive” Fed’s policy, “the U.S. debt downgrade by a rating agency from AAA to AA no doubt pushed up rates by a decimal point or two.”

“It may have risen even without the downgrade just due to record high national debt,” he added.

There are other factors that influence mortgage rates, Cohn explained, and which could impact them in the future, including the 10-year bond yield and the mortgage backed securities market.

“The 10-year bond yield is impacted by economic data: simply put, bad news for the economy is good news for mortgage rates,” Cohn said.

Bond yields have soared recently as data has shown that the economy has been surprisingly resilient to the Federal Reserve’s aggressive rate hikes, Cohn explained. Employment remains much stronger than expected and the rate of inflation has not dropped to the Fed’s desired level of 2 percent.

“Unrest globally also has a big impact on mortgage rates,” she added. “The new war between Israel and Hamas has actually caused bond yields to decline by .25 percent, which is good news for mortgage rates.”

What’s Next?

So what’s likely to happen to mortgage rates in the coming months? Will they be finally coming down?

Cohn is positive that mortgage rates “will begin to drop when the Fed announces that they have concluded this rate hiking cycle and begin to cut rates.”

Yun is also optimistic. “Fortunately, the worst in rates may be past us,” he said. “The Fed is unlikely to raise rates and likely to cut rates in 2024 as inflation slides down.”

But Wiseman has a different opinion. “I don’t see rates falling,” he said. “Rather, I anticipate them being stable or rising as rates of at least 5 percent become the new benchmark.

“Things are starting to slow, but there hasn’t been enough pain yet. In my opinion, a rate decrease is also nowhere near, and I do not anticipate one until at least the Q2 2024.”

According to Wiseman, mortgage rates will rise “modestly” in 2024.

“They may begin to slow in approximately a year, but they will never return to the 2 to 3 percent range that they were previously,” he added.

“Homebuyers and homeowners should brace themselves for interest rates above 6 percent. Even if interest rates fall more, I expect they will remain between 5.5 and 6.5 percent for the foreseeable future. I don’t believe it will cause a crash; rather, I believe it will simply become the new standard by which we live.”