Mortgage rates have reached historically high levels, with the average rate on a 30-year home loan surpassing 7.5 percent in late September, marking the first time it has done so since November 2000, according to data from Bankrate. As we enter October, experts anticipate rates to remain close to this elevated point, with the potential for some moderation. One significant factor influencing mortgage rates is the sentiment surrounding Treasurys, though this presents a low-probability, high-impact scenario. Barring such an event, October may bring renewed concerns about economic weakness and strained consumer conditions, potentially leading to a slight decrease in mortgage rates, although it’s unlikely to dip below the 7 percent threshold. — Greg McBride, Chief Financial Analyst at Bankrate.

Fed’s ‘higher for longer’ keeps pressure on mortgages

The surge in mortgage rates happened more quickly than expected, with the average rate on a 30-year home loan rising to 7.55 percent in Bankrate’s final survey of September, up from 7.42 percent earlier in the month. To put this into perspective, for a 30-year loan at this rate, borrowers would pay approximately $702 per month for every $100,000 borrowed. At the current median national home price of $407,100, this translates to about $2,775 per month, assuming a 3 percent down payment.

Earlier predictions had suggested the possibility of rates falling to 5 percent this year. However, the Federal Reserve’s September meeting signaled a different outlook, with a reluctance to cut rates further in the near term. This shift in perspective led to an increase in 10-year Treasury yields, which are closely tied to 30-year mortgage rates. Scott Haymore, Head of Capital Markets and Mortgage Pricing at TD Bank, notes that the Fed’s current stance seems to be “higher for longer,” with any rate cuts expected to be deferred until Q2 2024.

For months, inflation and the Fed’s policy decisions have been the primary drivers of mortgage rates, even though the Fed doesn’t directly control these rates. However, its actions have a significant impact on overall borrowing costs.

Outlook hazy for the rest of the year

Looking ahead, economists agree that the pandemic-era 3 percent rates are unlikely to return. The key question now is how much higher rates will climb. Greg McBride emphasizes that the most significant risk to mortgage rates is a broad shift in sentiment for Treasurys, although it’s considered a low-probability event. Absent such a scenario, October may bring concerns about a weakening economy and consumer strain, potentially leading to a slight reduction in mortgage rates, though it’s unlikely to breach the 7 percent threshold.

Projections vary among experts. The Mortgage Bankers Association (MBA) predicts a decline in rates to 6.3 percent by the end of 2023. However, Scott Haymore of TD Bank foresees minimal rate changes in the near term, expecting rates to remain within a quarter-point of their current levels for the remainder of the year. Lawrence Yun, Chief Economist at the National Association of Realtors, suggests that the possibility of mortgage rates reaching 8 percent in the short run cannot be ruled out.

A roadblock in more ways than one

Despite rising mortgage rates, home price appreciation hasn’t slowed and listings are still moving quickly. As the height of homebuying season fades, buyers are now weighing whether to take a higher rate — in hopes of refinancing later — or, perhaps more frustrating, wait things out.

If your aim is to close by the end of 2023, don’t delay, and carefully consider a rate lock.

“The trend has not been our friend and rates continue to get worse than I had expected based on recent data,” says James Sahnger of C2 Financial Corporation in Jupiter, Florida, adding “until we receive additional data to indicate a decidedly weaker economy, take a defensive posture when locking your rate.”

Rates above 7 percent are as much a psychological barrier as a financial one, says Lisa Sturtevant, chief economist at Bright MLS, a listing service in the Mid-Atlantic region.

“For many would-be homebuyers, a mortgage rate above 7 percent simply means that the numbers do not work for them,” says Sturtevant. “Consumer confidence has started to stumble as individuals and households are becoming more anxious about the economy.”

Indeed, 42 percent of respondents to a recent Bankrate survey cited paying for housing, either a mortgage or rent, as a negative influence on their mental health.

Still, American homeowners have proven their ability to adapt. In the 1980s, mortgage rates averaged 12 percent, but we kept buying homes.

Of course, home values weren’t nearly as high then. Add those two things together, Sturtevant says, and “the seemingly unstoppable housing market may be about to finally and truly stall out.”