(NerdWallet) – Mortgage rates are likely to continue to rise in October. Projecting mortgage rate trends this month isn’t particularly complicated, but it’s unlikely to be a treat either.
While we don’t face the specter of another Federal Reserve meeting until November, the central bank statement 75 basis point rate increase in late September, coupled with their latest round of predictions for interest rates, should be more than enough to spook mortgage lenders. What is less clear is whether lenders will load up on the anticipated hikes by raising interest rates rapidly in October or if we will see more gradual increases.
Federal Reserve action sends mortgage rates soaring
The Federal Reserve may not scare inflation yet, but it’s undoubtedly got a reaction from the housing market. Mortgage interest rate has been increasing ahead of every Fed meeting in 2022, an upward trend even before the first hike in the federal funds rate was announced in March.
The lead-up to the September meeting saw a significant jump, with 30-year fixed rate mortgages surpassing and then holding above 6%. Arguably, this is a mortgage lender that is out in front of the Fed. An aggressive 75 basis point increase is expected, and some even consider a 100 basis point increase a real possibility.
In addition to the usual announcements, the Federal Reserve issues a Summary of Economic Projects following its September meeting. This prediction comes out four times a year; the last one was back in June. The strategy grew much more aggressive over the summer, estimating that the federal funds rate – currently 3% to 3.25% – will reach around 4.4% by the end of the year and even higher in 2023. In June, the final figure The forecast for 2022 is 3.4%, of which two more rounds of rate hikes in November and December will easily pass.
Even though mortgage interest rates not directly related to the federal funds ratean increase to that rate makes all types of loans — including getting a home loan — more expensive.
Affordability worsens even as prices start to drop
This ascension rate environment gives many people goosebumps prospective home buyers, even as house prices show signs of weakening. Despite continued year-over-year gains, as of August, the average existing home price had fallen for the second month in a row, according to the National Association of Realtors. However, the additional interest the financed buyer has to pay could potentially erase the benefits of the lower price.
To borrow $300,000 at a 6% interest rate, the buyer would see a monthly principal and interest payment of nearly $1,800. In early 2022, when interest rates are around 3.5%, the monthly payment on a $300,000 mortgage will be just under $1,350. The same loan would now cost about $450 more per month.
Rising borrowing costs put pressure on demand, as the Fed hopes, creating less competition in some markets. There is still a shortage of available houses. However, if this trend continues, we could see a housing market in favor of buyers before the year ends, according to Black Knight, a mortgage and real estate analytics firm.
What happened to mortgage rates in September
Mortgage rates go up every week in September. Interest rates for 30 year fixed rate mortgages had a brush with 6% back in June, but last month they quickly went north of 6% and stayed there. Other types of lending have also seen an increase — interest rates on 15-year fixed-rate mortgages and 5-year adjustable-rate mortgages, for example, have been above 5%.
Our September forecast predicts that interest rates for fixed rate mortgages will “remain fairly stable” for the first three weeks of the month, potentially rising following the Fed’s announcement on the 21st. Instead, the hikes begin immediately after Labor Day, as those weeks Federal Reserve officials made public comments about their commitment to fighting inflation with rate hikes, plus a report from the Bureau of Labor Statistics showing that while the inflation rate has slowed, it is still near a 40-year high.