Where will the mortgage rate be headed?

 The 30-year mortgage rate is over 7.5% now and I'm pretty sure this is a common question for a lot of people where the mortgage is heading. I'm sharing some very informative data below, which basically warns that we should not expect the long term mortgage will come down soon.

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Over the past year, mortgage rates have averaged between 6% and 7%. That's very high compared with the past decade.

And as recently as 2019, homeowners were refinancing in droves, taking advantage of rates below 3%.

Call it recency bias, but it seems that many homebuyers were expecting to only pay a substantially high monthly payment for a short period of time.

But what I found most distressing were the following results...

When asked how low rates would need to fall for them to refinance, 43% of respondents said between 5.5% and 6%.

And 13% say they won't be able to keep making payments if they can't refinance – among borrowers with an adjustable-rate mortgage, that figure is higher at 16%.

Why is this troubling?

Well, we should expect interest rates to stay higher for longer. But when interest rates start falling, we shouldn't expect mortgage rates to drop by the same amount.

Meaning, just because the Fed cuts interest rates by 50 basis points, your lender isn't going to give you the same break.

In fact, it'll probably be a much smaller drop in mortgage rates...

I went back to look at how the average 30-year fixed mortgage rate fared following a peak in interest rates during each of the last three recessions (excluding 2020).

Using data from three periods (i.e., 1989 to 1992, 2000 to 2002, and 2007 to 2009), I found that on average, the 30-year fixed mortgage rate falls only 21.5% from the date the fed-funds rate peaks to when the Fed stops its rate cuts. Meanwhile, the fed-funds rate fell 80.4% from its peak during this easing period.

So, given the most recent Fed projections – and the historical chasm between the average declines in mortgage and interest rates – homeowners shouldn't expect to refinance with a sub-5.5% mortgage rate anytime soon.

Take a look...

 

Even if interest rates see a decent-sized drop over the next few years, it won't be the same for mortgage rates. That's not much relief for homeowners, especially since their finances are already spread thin.

While I believe that interest rates would need to stay higher for longer than most would have thought, I will admit that this latest projection seems just a bit too long.

Frankly, with rates this high in these economic conditions, something is bound to "break" sooner than later. And it could all happen "gradually, then suddenly."