Mortgage rates have moved higher again, with the average 30 year fixed mortgage recently moving above 7%.
So what happened, and where could rates go over the next year?
The answer involves the Federal Reserve, inflation, the economy and, most importantly, the 10 year U.S. Treasury yield.
The Fed Does Not Directly Control Mortgage Rates
One of the biggest misconceptions is that mortgage rates move directly with the Federal Reserve.
They don’t.
Mortgage rates tend to follow the 10 year Treasury yield much more closely. When Treasury yields rise, mortgage rates typically rise. When Treasury yields fall, mortgage rates generally have room to move lower.
Recently, the 10 year Treasury moved above 5%, putting additional pressure on mortgage rates.
What Do We Expect Over the Next Year?
Our expectation is that mortgage rates will remain higher and somewhat volatile over the next 12 months.
Could rates move back into the 6% range? Absolutely.
For that to happen consistently, we would likely need to see inflation improve, economic growth slow and the 10 year Treasury move lower.
Could mortgage rates reach 8%? It’s possible. If mortgage rates are already in the low to mid 7% range, another 50 to 75 basis point increase could put some borrowers near 8%.
Don’t Just Focus on the Interest Rate
This is where today’s buyers market can create an opportunity.
Let’s say a home is listed for $500,000, but you’re able to negotiate the price down $30,000 to $470,000.
Compare that with waiting for mortgage rates to drop half a percent while paying the full $500,000 asking price.
Assuming 10% down on a 30 year mortgage:
$500,000 home at 6.50%
Loan amount: $450,000
Principal and interest: approximately $2,844 per month
$470,000 home at 7.00%
Loan amount: $423,000
Principal and interest: approximately $2,814 per month
Even with the higher interest rate, the buyer who negotiated $30,000 off the price has a slightly lower principal and interest payment.
More importantly, they purchased the property for $30,000 less.
And if rates eventually decline, that buyer may have the opportunity to refinance the lower loan balance.
What Does This Mean for Austin Buyers?
Higher rates hurt affordability, but buyers currently have something they haven’t had in years.
Negotiating power.
Instead of focusing only on the interest rate, look at the entire transaction. A lower purchase price, seller paid closing costs or money toward an interest rate buydown can sometimes be more valuable than waiting for rates to fall.
What Does This Mean for Sellers?
Pricing matters more than ever.
Today’s buyers aren’t just looking at the price of the house. They’re looking at the monthly payment.
Higher mortgage rates reduce purchasing power, which means sellers need to be realistic about pricing from the beginning.
What I’m Watching
The number I’m watching closely isn’t just the Federal Reserve rate.
It’s the 10 year Treasury yield.
If the 10 year Treasury begins moving lower and inflation continues improving, mortgage rates should eventually follow.
Until then, I expect mortgage rates to remain elevated and move up and down as new economic data comes out.
For buyers and sellers, the goal isn’t to perfectly time interest rates. It’s understanding today’s market and using current conditions to your advantage.
