Current mortgage rates are more than half a percent higher than they were at the beginning of May, and threatening to move higher. Could this be the beginning of the end for ultralow mortgage rates?
To calculate where rates could be headed, the analysis below digs into some historical figures -- and reaches a projection that could startle prospective home buyers and refinance candidates.
How high will mortgage rates go?
Rather than looking at possible extreme outcomes, this model uses one very conservative assumption: that inflation will remain as moderate as it has been over the past five years.
Mortgage lenders choose interest rates that they hope will earn them a premium over inflation. That premium has to cover their expenses and default risk, and if all goes well, earn them a profit. Over the past 40 years, rates on 30-year mortgages have averaged 8.68 percent. With inflation averaging 4.27 percent a year over the same period, this means mortgage lenders have charged an average premium over inflation of 4.41 percent.Fortunately, inflation has been much more tame in recent years than over most of the past 40 years. Over the past five years, inflation has averaged just 1.6 percent annually. Assuming inflation remains under control, applying the long-term average premium for a 30-year mortgage rate to the current inflation rate would yield a "normal" mortgage rate of 6.01 percent. Why are current mortgage rates so far below that? Much of it has to do with the Federal Reserve's efforts to reduce interest rates. If that's been a key factor in keeping mortgage rates below normal levels, then the end of that intervention might trigger a return to a more normal premium over inflation.