Mortgage Rates Expected to Drift Upward
The ten-year Treasury rate has been somewhat volatile recently, falling after the Fed’s taper announcement but then rebounding following the release of the October CPI report. As of this writing, the yield was 1.56 percent. Similarly, the average yield of a 30-year fixed-rate mortgage rose as high as 3.14 percent for the week of October 28, the highest since the beginning of April, according to Freddie Mac’s Primary Mortgage Market Survey, though rates pulled back somewhat and averaged 2.98 as of the most recent data.
We forecast the 30-year mortgage rate to average 3.3 percent for 2022 and 3.5 percent for 2023, a modest rise from current levels. The Fed has taken pains to broadcast its tapering and rate hiking plans to avoid a repeat of the 2013 temper tantrum, when market expectations suddenly shifted regarding the long-run real rate, and for now both financial market and survey measures of long-term inflationary expectations remain mostly anchored. Therefore, our baseline forecast is that these effects are largely “baked in,” leading to only a modest drift upward in mortgage rates over the next few years. The risk, however, is that if longer-run inflation expectations start rising meaningfully, then rates could move decidedly higher. Alternatively, if higher inflation prompts a more aggressive Fed tightening going forward and this is seen as risking another recession, long rates could start falling again, inverting the yield curve.
Unfortunately, these GSEs likely own over 90% of the US residential mortgage market and all our eggs are in their basket.