Mortgage rates tend to rise when the Federal Reserve increases the Fed Funds rate. It has a gradual trickling effect, though.
Because of the fed funds rate's relationship to the 10-year treasury yield, mortgage rates would continue gradually increase even if Fed Chair Jerome Powell and the central bank elected to lock it in place now through 2023.
To help account for the risk of default, borrowers on mortgages pay a premium above risk-free Treasury rates. On Monday, the 30-year Treasury rate increased to $43.84, the highest level since May 2011.
Read More: How Scary Is The Housing Market? High Mortgage Rates, Low Builder Confidence Have Buyers Spooked
What Happened: “It’s possible that mortgage rates will hit double digits sometime next year,” Dock David Treece, Benzinga’s Mortgage Lead said on Monday. “But, if they do, it’s almost certainly going to be a by-product of the Fed raising rates to curb general speculation, corporate borrowing and other activities.”
Thirty-year fixed rates approached 7% on Monday — coming in at 6.94% — the highest since February 2002, according to data issued by Freddie Mac.
“Mortgage borrowing has already dropped off considerably in light of rate changes so far this year,” Treece continued, “a fact that the Fed is likely keeping in mind when considering additional rate hikes.”
While the Fed does take buyer activity and the effects of its rate rises into consideration, there are currently no strong signals that U.S. inflation is beginning to decline from a 40-year high.
Why It Matters: There is a strong likelihood that the Fed will raise interest rates by another 75 basis points at its meeting in November and possibly by the same amount once again in December.
“The mortgage market may be a victim of rate hikes intended to curb speculation, but if rates do hit 10% next year, it won’t be because the Fed specifically wanted it to happen,” Treece noted.
In an effort to combat inflation, the Fed has rushed to raise rates, which has shaken financial markets, crashed equities and resulted in a sharp decrease in the issuance of mortgage bonds this year. It has also increased the cost of borrowing for businesses, governments and individuals.
So, what are the chances the Fed jolts rates above 10% in 2023? According to Treece, “I would probably say the odds of mortgage rates hitting double digits before 2024 at 1 in 3."
Did you know housing is a commodity? Learn more on Benzinga's Housing page.
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