Mortgage rates could stay higher in July

July Mortgage Rate Forecast

Mortgage rates are expected to rise in July, extending a seven-month streak.

High inflation and the Federal Reserve’s efforts to control it have pushed mortgage rates to the top. The same factors could push them even higher in July and over the next few months. Rates will stop rising one day, but probably not this summer or fall.

Inflation is driving interest rates higher

Higher interest rates tend to accompany high inflation, and prices have risen at an annual rate above 8% for three consecutive months. The consumer price index stood at 8.6% in May (latest data available).

The price of silver goes up in times of high inflation, as are the prices of bacon and eggs. The higher price of money manifests itself in the form of higher interest rates. To make a profit, lenders raise rates on all types of loans, including mortgages.

As long as inflation remains high, mortgage rates are likely to rise. Expect that to be the case in July.

The role of the Fed in the rate hike

As lenders raise interest rates to stay profitable, Federal Reserve pushes interest rates higher, too. But the Fed is a government agency, so it didn’t raise rates in search of corporate profit. Instead, it tries to lower the rate of inflation.

When it costs more to borrow, consumers spend less money, which dampens inflationary pressures. This is why the Fed is raising interest rates.

The Fed has raised the short-term fed funds rate by 1.5 percentage points so far this year, and members of the rate-setting committee have indicated they plan to raise it by at least 1, 5 percentage points higher by the end of 2022. In fact, they may go another 1.75 or 2 percentage points.

Although the Fed’s rate hike campaign has yet to bring the inflation rate down, rate policy has worked as expected in other ways. Household spending slowed sharply in May, according to the Bureau of Economic Analysis. Spending rose 0.2% in May, compared to 0.6% in April.

And fewer people are buying homes. This is an indirect objective of the Fed, because when the housing market cools, house prices will not rise as quickly.

A sudden slowdown

Fewer people are buying homes because rising mortgage rates and prices are making housing less affordable. Sales slowed considerably when mortgage rates rose sharply.

As home sales slow, the number of homes on the market accumulates. In the week ending June 25, there were 25% more homes on the market than the same week a year earlier, according to data from Realtor.com. Accentuating this turning point in the market, the number of price cuts on listed houses almost doubled over the same period.

If the housing downturn turns into a real downturn, it’s possible that lenders will cut mortgage rates to attract fewer borrowers — to earn the same slice of a shrunken pie. If the forecast of a mortgage rate hike in July turns out to be wrong, that’s the most likely reason: a slump in home sales leading to price competition among mortgage lenders.

What happened in June

The average 30-year fixed-rate mortgage rate averaged 5.66% in June, compared to an average of 5.32% in May. The monthly average rate has increased every month since November.

At the beginning of June, I predicted that mortgage rates would be volatile and that the average 30-year fixed rate would be higher in the last week of June than the last week of May. Both predictions were correct. I correctly predicted five months in a row, and nine of the last 12.

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