Everyone seems to agree that mortgage rates above 7% are the new normal.
The phrase has cropped up a lot lately in public comments from housing economists, including Lawrence Yun, chief economist at the National Association of Realtors, and Robert Dietz, chief economist at the National Association of Home Builders.
This trend is increasingly reflected in forecasts, with major housing groups expecting mortgage rates to remain above 7% until 2027. Fannie Mae predicts mortgage rates could average 7.5% in 2027, while the Mortgage Bankers Association expects them to remain above 7%.
That means the 3% or 4% mortgage rates that borrowers were accustomed to in the years leading up to 2022 are unlikely to return anytime soon.
“We’re definitely going to see some ups and downs depending on the data, but we’re not in the same economic environment as we were in the 2010s or during the pandemic,” said Jenna Stauffer, broker and market analyst at Sotheby’s International Realty.
Reasons why mortgage interest rates may remain high for a long time
Mortgage rates tend to move in conjunction with the 10-year Treasury yield, which serves as a benchmark since mortgages are typically paid off or refinanced well before the 30-year term. And there is reason to think these long-term borrowing costs could still rise.
One is persistently high inflation. When inflation rates remain high, investors generally demand higher yields on long-term bonds to compensate for the decline in purchasing power of the funds that will eventually be repaid. Inflation, as measured by the Fed’s preferred PCE price index, has not fallen below the central bank’s 2% target since February 2021.
But inflation is not the only factor. Thelma Hepp, chief economist at real estate data firm Kotality, said the artificial intelligence boom is spurring massive private investment in data centers, power generation and other infrastructure, while the federal government is borrowing heavily. The combination of increased capital demand could put upward pressure on long-term borrowing costs, she said.
Compared to the 2010s, “we have moved from a world where there is more capital than investment opportunity to a world where there is intense competition for capital,” Hepp says. Low inflation, abundant savings and relatively weak demand for capital kept mortgage rates low during this period, he said.
Demand for mortgage bonds is also declining, putting upward pressure on mortgage rates. Tom Graff, chief investment officer at wealth management firm Facet, said banks have become reluctant to own mortgage-backed securities after the sharp rise in interest rates in 2022-2023 caused significant losses in their bond portfolios. This is because bond prices generally fall when interest rates rise. The failures of Silicon Valley Bank and First Republic also prompted increased regulatory scrutiny of banks’ bond holdings, he said.
During the pandemic, the Fed has pushed interest rates up in the opposite direction. The Fed bought large amounts of Treasury bonds and mortgage-backed securities to lower long-term borrowing costs, pushing mortgage rates to historic lows. The Fed has since moved away from aggressive purchases of mortgage-backed securities, said Steve Kaminski, head of home lending at TD Bank.
With these low interest rate conditions no longer in place, “mortgage rates are likely to remain high for at least the next year,” Kaminsky said.
What will it take for mortgage interest rates to fall?
Hepp said getting mortgage rates back to about 6% would likely require lower inflation, slower economic growth or less pressure on government borrowing to drive 10-year Treasury yields lower.
Kaminsky similarly said that falling below 7% will require lower inflation and lower bond yields. He said a slowing economy could push interest rates lower and yields lower as investors seek the relative safety of U.S. Treasuries.
That’s why Hepp doesn’t like to call 7% the “new normal,” because it’s uncertain whether that will happen and there’s nothing permanent about that particular number. But the low inflation, plentiful capital and easy Fed policy that helped create 3% and 4% mortgages are no longer working, he said.
This means that waiting for a significant drop in mortgage rates could be a gamble for prospective home buyers.
“I don’t think we should expect to go back to a financial situation that was producing 3% or 4% mortgages on a daily basis,” Hepp said.
