Mortgage rates might hit 8%: Here’s what that means for you

(NewsNation) —The current average interest rate for a 30-year-fixed mortgage is above 7% — and now, a new report has economists saying this could go up to 8%.

Bankrate reported Thursday that mortgage rates are at 7.58%, an increase of around 18 basis points from what the publication recorded last week. Freddie Mac said similar. As of Aug. 17, it noted, the 30-year fixed rate mortgage rate was 7.09%. That’s the highest level it’s been at for over 20 years, Freddie Mac wrote.

Recently, experts told MarketWatch that an 8% mortgage could be coming up if the economy continues to show signs of strength and the Federal Reserve raises interest rates again.

“The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb,” Freddie Mac wrote.

What are experts saying?

The 30-year rate is at a “critical stage,” Lawrence Yun, chief economist at the National Association of Realtors, told MarketWatch.

Cris deRitis, deputy chief economist at Moody’s Analytics, said in MarketWatch that mortgage rates could rise “significantly” if global investors demand higher yields for fixed-income assets.

Right now, the gap between the 30-year-fixed mortgage rate and a 10-year Treasury bond is around 300 basis points. That is “elevated and highly unusual,” deRitis said.

“Historically, the mortgage-rate spread has only been around this level only during periods of financial crisis such as the Great Recession or the early 1980s recession,” deRitis said to MarketWatch. “The historical average is closer to 175 basis points.” 

According to Investopedia, Treasury bond yields are the effective annual interest rate paid by the U.S. government on its debt obligations. Investors look at this to see the annual return they can expect when holding a U.S. government security and how to gauge economic prospects.

If this 300-point spread between the Treasury bond and mortgage rates grows while interest rates go up again, deRitis said a mortgage rate of 8% or more could soon be a “distinct possibility.”

This isn’t necessarily something that will take people by surprise. When the New York Federal Reserve took its Survey of Consumer Expectations earlier this year, households polled said they expect mortgage rates to rise to 8.4% by next year.

In the Wall Street Journal, Yun said if the Federal Reserve declares that inflation is “contained,” mortgage rates could fall to 6%. If it raises rates, then that 8% could become a reality.

What could happen if mortgages hit 8%?

Real estate website Zillow said the housing market might go back into a deep freeze. In a May report detailing what would happen if the U.S. defaulted on its debt, causing an 8% rate, Zillow’s Jeff Tucker estimated that existing home sales could fall as much as 23% and that home values could drop by 5% at the end of 2024. However, he notes such a default is unlikely.

While Yun, speaking to MarketWatch, also predicted a freeze with fewer buyers and sellers if 30-year mortgage rates hit 8%, he doesn’t expect high rates to hurt home prices right away.

“As long as the job market doesn’t turn negative, then home prices will be stable — though home sales will take another step downward,” Yun said. “If there is a job-cutting recession, then home prices will fall as some will be forced to sell while there are few buyers.”

Although they projected a possible recession a few months ago, economists have dialed these prognostications back recently. One survey of 69 economists by the Wall Street Journal put the odds of a recession at 54%, down from the 61% reported in April. Bloomberg also polled economists, who put the chances of a recession at 60%, not the 65% expected in March.

At a mortgage rate that exceeds 6%, though, there are also many potential buyers that have been “sidelined,” especially if they are trying to be homeowners for the first time, deRitis said in a MarketWatch interview. The prevailing rate rose from nearly $1,100 a month in 2019 to $2,100.

With an 8% mortgage rate, the monthly payment for a median-priced home would be over $2,300, deRitis said, meaning that even more potential buyers could be excluded, including those with above-average incomes.

Does a 1% increase really make a difference?

As the mortgage rate is currently hovering around 7%, going to 8% would mean a small bump — but a meaningful one all the same.

Lower mortgage rates directly translate into smaller mortgage payments — and more significant savings — every month, Rocket Mortgage points out, so it’s best to lock in the lowest possible one.

“A single percentage point increase in mortgage rate may seem like it would produce only a small increase in your monthly payment, but remember, over time, this increase can add up to a small fortune,” the publication wrote.

Over the life of a 30-year loan term, Rocket Mortgage notes, a 1% increase in mortgage rates could add up to tens of thousands of dollars.