Inflation Pushed Mortgage Rates to their Highest Point Since 2008 This Week. Why Homebuyers Shouldn’t Panic, Says One Expert

A photo to accompany a story about the latest mortgage rates David Paul Morris/Bloomberg via Getty Images
A "For Sale" sign outside a house in Albany, California, on Tuesday, May 31, 2022. Homebuyers are facing a worsening affordability situation with mortgage rates hovering around the highest levels in more than a decade.
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A worse-than-expected inflation report was all it took to abruptly shutter a short window in which mortgage rates were steady at slightly lower rates.

The average 30-year fixed mortgage rate jumped 42 basis points – almost half a percentage point – to 5.78% this week, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures. A similar survey by Freddie Mac, a government-sponsored entity that buys mortgages on the secondary market, also hit 5.78%, an increase of 55 basis points. 

The Freddie Mac average hasn’t been that high since November 2008, during the financial crisis. Before then, the average was routinely over 5%, often much higher.

The jump started Friday when the Bureau of Labor Statistics reported a year-over-year inflation rate of 8.6% for May, the highest since December 1981. That report showed that inflation was more prevalent and persistent than many hoped it would be, says Jacob Channel, senior economist at LendingTree.

“I think that what lenders saw was that the writing was on the wall for, relatively speaking, a big interest rate increase from the Fed,” Channel says.

That Federal Reserve increase came Wednesday, with the central bank raising its benchmark short-term interest rate by three-quarters of a percentage point, the largest single hike since 1994. “I think what we’re seeing is that lenders had already anticipated that the Fed was going to raise the fed funds rate by 75 basis points and they began to preemptively push mortgage rates up,” Channel says.

There may be some hope: Channel says it’s possible lenders “overcorrected a little bit.” Overnight rate averages did fall after the Fed’s announcement, after coming within a hair of 6%.

The Fed’s big rate increase is part of an effort by the central bank to tame high inflation, and Chairman Jerome Powell addressed the effect of those actions on the housing market in response to a reporter’s question Wednesday.

“If you’re a homebuyer or a young person looking to buy a home, you need a bit of a reset,” Powell said. “We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgage rates are low again. This will be a process whereby ideally we do our work in a way where the housing market settles in a new place and housing availability and credit availability are at appropriate levels.”

What Do These Mortgage Rate Trends Mean for Homebuyers?

The best thing buyers can do in a rate environment like this is shop around for a lender, Channel says. “Different lenders offer different rates to the exact same person.”

Potential borrowers should also put themselves in a good financial position before starting the homebuying process, he says. That includes saving up for a down payment, ensuring you have steady income coming in, and that you’ve paid off other debts. Lenders are “going to be more and more diligent about who they originate loans to,” Channel says.

Pro Tip

Shop around for a mortgage. Lenders will offer different rates to the same borrower, so put yourself in position to get a good one.

It’s also important to remember that your mortgage may be for 30 years, but you don’t have to keep it for that long. If rates drop in the future, you could refinance and save money. “They’re high today,” Channel says. “They might not be this high a few years from now. Certainly refinancing is an option for people.”

Buyers seeing higher rates shouldn’t panic, but should be careful, Channel says. Don’t break your budget, especially with high inflation, where your grocery or fuel costs could go up and jeopardize your situation if your housing costs are too high. “Now can still be a good time to buy, especially if you’ve got the cash, if you’ve got the credit score, if you’re able to build your financial profile,” he says.