If you are planning to buy a home or refinance your existing mortgage in the next decade, you might be wondering what will happen to the mortgage interest rates in the future. Will they go up or down? How much will they affect your monthly payments and your overall affordability? In this blog post, we will try to answer these questions by looking at some of the factors that influence mortgage rates and some of the expert predictions for the next 10 years.
What Factors Affect Mortgage Interest Rate Forecast for Next 10 Years?
Mortgage rates are determined by a complex interplay of supply and demand, risk and reward, inflation and expectations, and monetary policy and market forces. Some of the main factors that affect mortgage rates are:
The Federal Reserve:
The Fed is the central bank of the United States that sets the short-term interest rates that influence the cost of borrowing for banks and consumers. The Fed adjusts its policy rate, known as the federal funds rate, to achieve its dual mandate of stable prices and maximum employment.
When the Fed raises its rate, it makes borrowing more expensive and reduces the money supply, which tends to slow down inflation and economic growth. When the Fed lowers its rate, it makes borrowing cheaper and increases the money supply, which tends to stimulate inflation and economic growth.
The Fed's rate also affects the yield on Treasury bonds, which are considered safe investments that compete with mortgages for investors' money. When the Fed's rate goes up, Treasury yields tend to go up as well, which pushes mortgage rates higher. When the Fed's rate goes down, Treasury yields tend to go down as well, which pulls mortgage rates lower.
Inflation is the general increase in the prices of goods and services over time. Inflation erodes the purchasing power of money and reduces the real return on investments. Therefore, investors demand higher interest rates to lend money when inflation is high or expected to rise, and lower interest rates when inflation is low or expected to fall.
Mortgage rates are influenced by inflation expectations, which are reflected in various indicators such as the Consumer Price Index (CPI), the Personal Consumption Expenditures (PCE) index, and the breakeven inflation rate (the difference between nominal and real Treasury yields).
Economic growth is measured by indicators such as the Gross Domestic Product (GDP), the unemployment rate, and the consumer confidence index. Economic growth affects the demand for credit and the supply of savings in the market. When economic growth is strong or expected to improve, consumers and businesses tend to borrow more money to finance their spending and investment plans, which increases the demand for credit and pushes mortgage rates higher.
When economic growth is weak or expected to deteriorate, consumers and businesses tend to save more money and reduce their spending and investment plans, which decreases the demand for credit and pulls mortgage rates lower.
Market forces are the interactions between buyers and sellers that determine the price and quantity of goods and services in a free market. Market forces affect mortgage rates through changes in supply and demand, risk and reward, and expectations and sentiments. For example, when there is a high demand for mortgages from homebuyers or refinancers, lenders can charge higher interest rates to ration their limited funds.
When there is a low demand for mortgages from homebuyers or refinancers, lenders have to lower their interest rates to attract more borrowers. Similarly, when there is a high supply of mortgages from lenders or investors, borrowers can negotiate lower interest rates to choose among many options. When there is a low supply of mortgages from lenders or investors, borrowers have to accept higher interest rates to secure their financing.
Market forces also affect mortgage rates through changes in risk premiums, which are the extra returns that investors require to invest in risky assets over safe assets. For example, when there is a high perceived risk of default or prepayment in mortgages, investors demand higher risk premiums to buy mortgage-backed securities (MBS), which are bonds that are backed by pools of mortgages.
When there is a low perceived risk of default or prepayment in mortgages, investors accept lower risk premiums to buy MBS. Risk premiums also depend on factors such as credit quality, loan-to-value ratio, loan term, loan type, and market liquidity.
What Are The Long-Term Predictions for Mortgage Rates?
Given the complexity and uncertainty of the factors that affect mortgage rates, it is impossible to predict their exact movements in the future. However, based on historical trends, current conditions, and future expectations, some experts have made projections for mortgage rates for the next 10 years. Here are some of them:
- Long Forecast: Long Forecast is a website that provides forecasts for various financial indicators such as currencies, commodities, stocks, bonds, interest rates, etc. According to their latest forecast for 30-year mortgage rates in October 2023, they expect them to range from 7.40% to 7.86%, with an average of 7.63%. They also predict that mortgage rates will peak at 9.41% in May 2024, before gradually declining to 3.67% by November 2027.
- Forbes Advisor: According to their latest forecast for 30-year mortgage rates in October 2023, they expect them to average 7.63%, based on a survey of 15 experts from various fields such as economics, finance, real estate, etc. They also predict that mortgage rates will fluctuate between 7% and 8% throughout 2024, before falling below 6% by the end of 2025.
- CBS News: According to their latest forecast for 30-year mortgage rates in October 2023, they expect them to average 7.63%, based on the data from Freddie Mac, a government-sponsored enterprise that provides liquidity and stability to the mortgage market. They also predict that mortgage rates will drop to around 6% by the end of 2024 or the beginning of 2025, based on the opinions of several experts such as economists, analysts, and realtors.
As you can see, there is no consensus among the experts on what will happen to mortgage rates in the next 10 years. Some expect them to rise significantly, while others expect them to fall moderately.
However, most agree that mortgage rates will remain elevated in the short term due to inflationary pressures and Fed tightening, before declining in the long term due to economic slowdown and market correction.
Therefore, if you are planning to buy a home or refinance your existing mortgage in the next decade, you should keep an eye on the factors that affect mortgage rates and compare different options and scenarios to find the best deal for your situation.
It's important to note that forecasting Mortgage Interest Rates for the next 10 years is inherently challenging due to various unpredictable factors. Do not use the information as expert advice and be prepared for potential changes in the mortgage market.