Economists and Real Estate Pros Predict Mortgage Rates Will Hit 6%

Categories: Planning Real Estate

Published 04/28/2022

Photo by Pavel Danilyuk

Mortgage rates have finally hit 5% and if mortgage rates continue on their current trajectory, some experts predict 30-year fixed rates could hit 6% within the next few months. But others say the timeline is a little longer. Whenever rates hit this benchmark, one thing is clear: Though a 6% mortgage rate is still considered historically low, it would signify the highest level for rates in about the last decade.

The variables influencing its timing include inflation, the Fed’s interest rate hikes, and 10-year Treasury yields. The 10-year Treasury has been in the range of 2.4% in recent days, and if it rises to 3% or higher, 30-year mortgage rates will likely reach closer to 6%! While inflation is likely to trigger higher rates due to the inflationary pressures of Ukraine and Covid-related supply chain disruption could well lead to further rate increases by the Federal Reserve. 6% mortgage rates will seem inevitable soon enough.

How does a 5% mortgage rate affect the housing market?

Pros expect that higher mortgage rates will somewhat cool the housing boom, decreasing home sales by at least 10%. Predicting an average mortgage rate of 5% would squeeze affordability and dampen housing demand. However, a severe shortage of homes for sale and the lack of supply is a more relevant dictator of home prices than mortgage rates.

As a result of higher home prices and higher mortgage rates, the monthly mortgage payment on the typical listing is already up to $375 from one year ago — amounting to an extra cost of $4,500 per year to purchase a median-priced listing. Eventually, increasing monthly payments 30% higher than this time last year.

A 5% mortgage rate brings a sticker shock to buyers who have gotten used to the record-low rate environment of the last few years. Experts anticipated higher mortgage rates this year, but the speed of their rise has been breathtaking. “Record low mortgage rates had been an affordability lifeline during the pandemic, keeping monthly payments in check even while prices climbed quickly,” Zillow senior economist Jeff Tucker said in a recent article.

That said, should we expect to see demand diminish? Most likely not. There is a large generation of younger households. More than 45 million are in prime household formation and home-buying years of 26 to 35. While the monthly costs of buying are higher, the value of renting is also up, more than 17% in the last year, according to Realtor.com’s February rental report. First-time buyers often consider how their mortgage payment compares to the cost of renting, which has also risen sharply in the last year.

Home prices are on firmer ground, even if mortgage rates rise above 5% since rental costs are sharply rising. It is not out of the question to see a gradual cooldown from today’s record price growth by the end of this year. However, for now, ultra-low inventory will continue to keep the competition steady among homebuyers, regardless of rising rates.

Wondering how a higher mortgage rate will affect you? Or seeking the assistance of a realtor to walk you through the mortgage approval process? Contact Darryl Glass today at (510) 500-7531 to be connected with our preferred mortgage vendors. You can also click here to schedule a call with Darryl in the upcoming weeks at your convenience.