2022 is barely a month old, but mortgage rates have already gone up significantly. Each Thursday, Freddie Mac releases its Primary Mortgage Market Survey. As of last week, the average 30-year fixed-rate mortgage was 3.55%, up from 3.22% at the start of the year.
Why does this matter? Any increase in mortgage rates will impact what a buyer can afford. This table shows how mortgage rates impact your purchasing power:
When we talk to buyers, one of the most common questions they ask is about what's going to happen with interest rates. Will they keep going up? How high? How fast? Or will they settle down and remain steady? All are great questions.
How Can You Know Where Mortgage Rates Are Headed?
It's difficult to know exactly where mortgage rates will go, but you can get a great indication of where they may head by looking at the 10-year treasury yield. Understanding the mechanics of the treasury yield isn't as important as knowing that there's a correlation between how it moves and how mortgage rates follow. Here's a graph showing that relationship over the last 50 years:
This correlation has continued into 2022. The treasury yield has started to climb, and that's driven mortgage rates up. As of late January, the treasury yield was 1.81%. That's 1.74% below the mortgage rate reported the same day (3.55%) and is very close to the average spread we see between the two numbers (average spread is 1.7).
Where Will the Treasury Yield Head in the Future?
With this information in mind, a 10-year treasury-yield forecast would be a good indicator of where mortgage rates may be headed. The Wall Street Journal just surveyed a panel of over 75 academic, business, and financial economists asking them to forecast the treasury yield over the next few years. The consensus was that the treasury yield will climb to 2.84% by the end of 2024. Based on the 50-year history of following this yield, that would likely put mortgage rates at about 4.5% in three years.
While the correlation between the 30-year fixed mortgage rate and the 10-year treasury yield is clear in the data shown above for the past 50 years, it shouldn't be used as an exact indicator. They're both hard to forecast, especially in this unprecedented economic time driven by a global pandemic. But understanding the relationship can help you get an idea of where rates may be going. It appears, based on the information we have now, that mortgage rates will continue to rise over the next few years. That's something to keep in mind if buying a new home is in your future.
Final Thoughts
Forecasting mortgage rates is very difficult. As Mark Fleming, Chief Economist at First American, once said:
"You know, the fallacy of economic forecasting is don't ever try and forecast interest rates and or, more specifically, if you're a real estate economist mortgage rates, because you will always invariably be wrong."
But if you're either a first-time homebuyer or a current homeowner thinking of moving into a home that better fits your changing needs, understanding what's happening with the 10-year treasury yield and mortgage rates can help you make an informed decision on the timing of your purchase.
- Cari
