Navigating Mortgage Rates: Past, Present, and Future

If you're on the path to homeownership this year, mortgage rates are likely a key factor in your decision-making process. After all, mortgage rates profoundly influence what you can afford when securing a home loan, and with affordability concerns in the current market, it's vital to gain perspective on how mortgage rates compare historically and their relationship with inflation for insights into potential future trends.

Contextualizing the Rate Landscape

Since April 1971, Freddie Mac has diligently tracked the 30-year fixed mortgage rate. Weekly, they release data from their Primary Mortgage Market Survey, which aggregates mortgage application information from lenders across the nation (see graph below):

On the right side of the graph, we observe a significant uptick in mortgage rates since the beginning of the previous year. However, even with this increase, today's rates remain below the 52-year average. While historical context is valuable, many buyers have grown accustomed to mortgage rates ranging from 3% to 5%—a range they've occupied for the past 15 years.

This is pivotal because it explains the potential "sticker shock" felt due to recent rate increases, despite rates being close to their long-term average. While buyers have adapted to elevated rates over the past year, a slight dip in rates would be a welcome change. To gauge the likelihood of this occurrence, it's essential to examine inflation.

Where Could Mortgage Rates Be Heading?

Since early 2022, the Federal Reserve has been diligently working to curb inflation. This is noteworthy because, historically, a correlation exists between inflation and mortgage rates (see graph below):

This graph illustrates a compelling connection between inflation and mortgage rates. Focusing on the left side of the graph, each significant movement in inflation (depicted in blue) is closely followed by a corresponding shift in mortgage rates (depicted in green).

The circled segment of the graph highlights the recent surge in inflation, with mortgage rates subsequently beginning to rise. As inflation has moderated somewhat this year, mortgage rates have yet to mirror this trend.

Considering this historical relationship, it's reasonable to infer that the market is awaiting mortgage rates to align with inflation and potentially decline in the near future. While it's impossible to predict rate movements with certainty, the moderation in inflation suggests that lower mortgage rates could align with a well-established pattern.

In Conclusion

To gain insight into the potential trajectory of mortgage rates, reflecting on their historical path is invaluable. A clear correlation between inflation and mortgage rates underscores the importance of monitoring these trends. If historical patterns hold true, the recent decline in inflation may bode well for the future of mortgage rates, offering hope for your homeownership aspirations.