Image: Freepik

Mortgage rates have skyrocketed above 7% for the first time in over 20 years, presenting a major roadblock for homebuyers. Experts predict rates will stay elevated through October and potentially hit 8% as the Federal Reserve maintains its aggressive interest rate hikes to combat inflation.

The 30-year fixed mortgage rate averaged 7.55% in late September, according to Bankrate’s national survey of lenders. This represents a huge jump from rates below 3% just last year. At today’s rates, a homebuyer would pay $2,775 per month in principal and interest for a $407,100 home, the current median price.

Fed Rate Hikes Drive Mortgage Rates Higher

The Fed does not directly control long-term mortgage rates, but its policy moves influence yields on Treasuries which are tied to mortgage rates. After raising its benchmark rate by 0.75 percentage points in September, the Fed signaled more increases are coming to curb inflation.

This hawkish stance led the yield on the 10-year Treasury note to spike, dragging mortgage rates along with it. According to Greg McBride, Bankrate’s chief financial analyst, “Higher for longer seems to be the mentality of the Fed right now. They pushed out any decrease in rates until Q2 2024.”

The Fed’s fight against inflation has been the main driver pushing mortgage rates up over the past several months. After keeping rates near zero during the pandemic, the central bank has raised its policy rate rapidly to a range of 3–3.25% as of September.

October Outlook: Rates Could Hit 8%

In recent months, many experts thought mortgage rates would fall back to around 5% this year. But with the Fed’s latest guidance, that now seems highly unlikely.

Scott Haymore, head of Capital Markets and Mortgage Pricing at TD Bank, believes mortgage rates will hold steady through October. “I think over the remainder of the year, we’ll be within a quarter point of where we are now. I don’t think we’ll see 8%.”

However, other economists warn that 8% mortgages could become a reality. Lawrence Yun, chief economist at the National Association of Realtors, says “In the short run, it’s possible mortgage rates may go to 8%.”

While another rate spike could deal a blow to homebuyers, a broader decline in Treasury yields would bring welcome relief. But McBride sees this as a low probability in October. Barring a plunge in Treasury yields, mortgage rates will likely remain above 7%.

Housing Market Stumbles as Rates Deter Buyers

Amid rapidly rising rates, home prices have remained high due to strong demand and limited supply. But properties are taking longer to sell as more buyers get priced out or hesitate to commit.

Lisa Sturtevant, chief economist at Bright MLS, says rates above 7% are a major “psychological barrier” for many potential buyers. She notes, “Consumer confidence has started to stumble as individuals and households are becoming more anxious about the economy.”

A recent Bankrate survey found 42% of respondents said paying for housing negatively impacts their mental health. Adding high home prices to elevated rates makes buying even more difficult.

Sturtevant believes the seemingly unstoppable housing market may finally stall due to these factors. But she notes buyers have shown resilience in the face of past mortgage rate spikes. In the 1980s, average rates reached as high as 12% yet home purchases continued.

Tips for Homebuyers as Rates Rise

If you want to buy before 2023, experts advise against waiting in hopes of better rates. James Sahnger of C2 Financial suggests borrowers take a “defensive posture” by locking rates as soon as possible. Trying to time rate dips could mean missing out on buying altogether.

While today’s rates are far above the recent historic lows, they remain relatively moderate by past standards. Securing a fixed-rate mortgage insulates you from potential future increases.

Work with a knowledgeable lender to explore options like lower down payments or adjustable-rate mortgages. While ARMs carry risk, they offer lower initial rates. Paying discount “points” upfront can also secure a better rate.

Consider purchasing below your pre-qualified amount or looking at homes in more affordable areas. Even small changes can help offset higher rates. Above all, work with a lender to weigh tradeoffs and identify the optimal loan for your financial situation.

The Road Ahead for Mortgage Rates

Economists agree that the days of 3% mortgages are likely gone. But outlooks for where rates settle vary. The Mortgage Bankers Association predicts rates will fall to 6.3% by late 2023 as inflation cools. However, other experts see rates remaining above 7% into next year.

Much depends on whether inflation continues to ease and if the Fed can slow and eventually stop its rate hikes. Markets expect at least two more 0.75 percentage point increases this year. But further Fed moves will be data dependent.

Mortgage rates have tested homeowners’ resilience before, and markets have adapted. While today’s high rates and prices are daunting, those able to buy stand to benefit from fixed payments that will seem like bargains if rates rise further. Staying flexible and working with a lender to explore options is key to navigating today’s challenges.

For more mortgage and housing market insights, see Bankrate’s latest forecast analysis and expert predictions for mortgage rates and home prices. And subscribe to the Bankrate Daily newsletter for the latest rate trends.