Mortgage Rates Might Have Peaked, Experts Say. What That Means for You

An image of homes under construction is used to illustrate an article about mortgage rates. Credit: Elijah Nouvelage/Bloomberg via Getty Images
Housing under construction in Atlanta, Georgia, on Sunday, Nov. 13, 2022. The housing market has come to a standstill, but mortgage rates may be starting to come down. Experts say that’s a good sign for homebuyers.
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Mortgage rates have doubled since the start of 2022, slamming the breaks on a superheated housing market. But is 7% as high as they’re going to go?

Maybe.

“We probably have seen peak mortgage rates unless there is some other major shock to the economy,” says Cris deRitis, deputy chief economist at Moody’s Analytics. 

The case for optimism is that inflation came in softer than expected in October, with the Consumer Price Index showing prices up 7.7% year-over-year, after months at 8% or higher. That was a positive sign that inflation is coming down, and it sent the stock market soaring and mortgage rates dropping.

The average 30-year mortgage rate fell 23 basis points this week to 6.85%, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures.

But one bit of good economic news isn’t quite enough to determine if the tide has turned against the highest inflation in 40 years.

“I’m hoping that I’m also in that camp of ‘we’ve hit the peak,’ but we won’t know that for sure until next month,” says Nicole Rueth, producing branch manager with the Rueth Team Powered by OneTrust Home Loans. “It would take a lot to push us back above 7% again.”

Here’s why experts say mortgage rates might be turning around, and what to look out for next.

Why Mortgage Rates Are So High

To understand where rates could go next, it’s important to understand how they got to where they are now. The big surge has to do with inflation and the market for bonds, particularly mortgage-backed securities, which are bundles of mortgages that are packaged and sold to investors. 

As inflation rises, investors want bonds to pay a higher return if they’re going to buy them. They don’t want to make 2% on an asset if prices are rising by 8%. “Inflation is the archenemy of bonds,” Rueth says. With investors demanding higher returns, mortgage rates have had to rise massively. 

Also at play is the unusually wide gap between mortgage rates and the yield on the 10-year U.S. Treasury bond. Historically, mortgage rates have moved in concert with the 10-year Treasury yield, with the mortgage rate being about 1.8 percentage points higher. Today that gap is closer to 3 percentage points. A lot of factors have caused that change, namely that the Federal Reserve stopped buying mortgage-backed securities.

That spread will likely drop toward a more normal level over the next year or so, deRitis says, meaning mortgage rates would come down even if the 10-year Treasury yield holds steady.

“At this point the 10-year should hover around 4%, 4.5%, and the spread should start to narrow and therefore the mortgage rates should start to come in,” he says.

What Could Push Mortgage Rates Back Up?

One good inflation report doesn’t make a trend. “We’ll see what happens, but it seems to me like a disproportionate reaction to the [October inflation] report itself,” deRitis says.

The obvious factor that could drive mortgage rates back up is if future inflation data are higher than expected. The Consumer Price Index for November is set to be released Dec. 13, a day before the Federal Reserve is set to announce the next increase to its benchmark short-term interest rate. Another metric of inflation, the Personal Consumption Expenditures Price Index, or PCE, is set for release Dec. 1. 

Of course, the economy remains fragile and the world is unpredictable. Another shock related to COVID-19, the war in Ukraine, or anything else could cause mortgage rates to change course.

“In the realm of known unknowns, it seems as though the likelihood is more that we would go down than up,” deRitis says.

Rates should eventually come down, Rueth says. She expects they’ll settle around 5.5% sometime next year.

What Do Lower Mortgage Rates Mean for Homebuyers?

While mortgage rates have dropped a bit, they still aren’t dramatically lower. That means it’s still difficult for many buyers, particularly those looking for their first home, to afford a monthly payment. At the same time, home prices remain elevated, even as they start to dip a bit.

Consider the Timing of a Home Purchase

This dip in rates is great if you were on the bubble about being able to afford a home, but it doesn’t come at the best time for actually buying a home. “If you close in 30 days you’re right before Christmas,” Rueth says.

Buyers who are looking for homes right ahead of the holidays are those making an “intentional purchase,” because of the disruption during the holidays, she says. But it could be a good time if rates continue to decline: Fewer buyers will want to jump into the market, so those who do will have more choices and more bargaining power.

If rates drop more into early next year, more people will re-enter the market, and competition will increase. “If we see interest rates dropping in the spring and more demand comes out, buyers have an opportunity right now where it might not be the lowest interest rate but it’s an incredible opportunity to get out of the multiple bidding situation,” Rueth says.

Stay Within Your Budget

Regardless of the interest rate, what matters is that you can afford your monthly payments. “Work within your budget,” deRitis says. “Don’t over-extend. I would say don’t try to time the market either.”

Buyers should understand that they have more leverage now than they did a year ago, but that they still don’t have all of it. Make sure you’re including home inspection and appraisal contingencies – which were often left out in earlier, hypercompetitive markets. “Don’t be greedy,” deRitis says. “Don’t expect that just because it’s more of a buyer’s market that you can lowball a seller and walk away with the property.”

What About Adjustable-Rate Mortgages?

If rates have peaked, an adjustable-rate mortgage, or ARM, might make sense. ARMs typically work by having a set period, say five years, with a fixed interest rate, which is usually lower than the going 30-year fixed rate. After that, the rate will adjust with the market every year. That means your monthly payment could get more expensive – or could get cheaper.

“ARMs can be an attractive option but we want to be careful and still understand the risks,” deRitis says.

If you’re considering one, keep a couple of factors in mind: Make sure your initial “teaser” rate is at least 0.75% or 1% lower than what you could get with a 30-year fixed rate. And factor in how long you plan to keep the house: If you only expect to be there a few years, a shorter fixed period makes more sense.