Exploring Mortgage Interest Rates: Historical Trends, Current Status, and Potential Outlook

If you're considering purchasing a home in the current year, you're likely closely monitoring mortgage rates. These rates play a significant role in determining what you can comfortably finance when securing a home loan, and given today's affordability challenges, it's an opportune moment to examine the broader context of historical mortgage rate trends in comparison to the present. Additionally, gaining insight into their connection with inflation can provide valuable clues about potential future movements in mortgage rates.

Giving Context to the Sticker Shock

Freddie Mac has been monitoring the 30-year fixed mortgage rate since April 1971. On a weekly basis, they publish the findings of their Primary Mortgage Market Survey, which compiles and averages mortgage application data from lenders nationwide (as illustrated in the graph below):

Examining the graph's right side, we observe a substantial uptick in mortgage rates since the beginning of the previous year. However, despite this increase, the current rates remain below the 52-year average. While this historical context provides valuable insight, prospective buyers have become accustomed to mortgage rates ranging from 3% to 5%—a range that has persisted over the past 15 years.

This holds significance because it clarifies why the recent increase in rates could be causing you a sense of surprise, even though they are near their historical average. Although many buyers have adapted to these higher rates in the past year, a moderately lower rate would be greeted with enthusiasm. To assess whether this is a feasible scenario, it is crucial to delve into the realm of inflation.

Where Could Mortgage Rates Go in the Future? 

The Federal Reserve has been diligently striving to reduce inflation levels since the beginning of 2022. This is of particular importance because, throughout history, there has been a link between inflation and mortgage rates, as illustrated in the graph below:

This graph reveals a fairly consistent correlation between inflation and mortgage rates. When examining the graph's left side, it becomes evident that whenever inflation experiences substantial fluctuations (indicated in blue), mortgage rates tend to respond in kind shortly thereafter (indicated in green).

The highlighted segment of the graph highlights the recent upsurge in inflation, with mortgage rates tracking closely in its wake. However, even though inflation has shown some moderation this year, mortgage rates have not yet mirrored a similar shift.

This suggests that, drawing from historical patterns, the market anticipates mortgage rates to align with the trajectory of inflation and potentially decrease. While it remains challenging to make precise predictions about the future of mortgage rates, the trend of moderating inflation implies that a decline in mortgage rates in the near future would align with a well-established pattern.

Bottom Line

To gain insights into the potential direction of mortgage rates, it's beneficial to examine their historical trajectory. The evident link between inflation and mortgage rates suggests that if this historical correlation persists, the recent reduction in inflation could signal positive prospects for future mortgage rates and, consequently, your aspirations of homeownership.