August Mortgage Outlook: Rates Heading Higher

Mortgage interest rates are likely to move higher in August as the war in Iran appears to be intensifying. The war’s outbreak initially spurred mortgage rates higher this spring, and rates’ fates continue to be tied to news from the Middle East.

It’s true that the Federal Reserve didn’t raise the funds rate at its July 28-29 meeting, and it might seem like, if anything, that would give rates a bit of room to soften. But that’s not how markets reacted, so the Fed’s inaction might counterintuitively also put upward pressure on rates.

Let’s talk through how these dynamics are likely to play out this month — and what it could mean for home buyers.

Iran still has a hold on rates

The war in Iran’s been going on for more than five months now, and mortgage rates have been dragged along with it as fighting picks up, then abates, then seemingly inevitably picks up again. You wouldn’t be wrong to wonder why on Earth that would affect mortgage rates, but it does. Here’s the short version.

The war in Iran has disrupted global trade, driving up the prices of many commodities, including oil. From almost day one of the war, that’s made investors afraid that the war will exacerbate inflation (and it has, but we’ll get to that in a minute).

During times of upheaval, investors usually flock to bonds, which feel safer and more stable than stocks. But when inflation’s the issue, bonds’ safe, reliable returns aren’t worth as much. That means investors want lower prices and higher returns to offset inflation, and it’s those higher returns — technically called bonds’ yields — that are ratcheting up mortgage rates.

Mortgage lenders tend to use the yield on the 10-year Treasury note as a benchmark for their rates, because a mortgage has a similar level of risk and duration. (Even though most home loans last 30 years, the vast majority of homeowners sell or refinance way before then.) Because of this, when the benchmark 10-year Treasury yield goes up, mortgage rates do, too.

Investors’ panic about the war’s effect on inflation was why we saw mortgage rates rise so rapidly in March. Since then, mortgage rates’ ups and downs have been heavily influenced by what’s happening in the Middle East. For example, the first ceasefire back in April saw rates ease lower. Last month, we watched rates rise as the two sides traded attacks.

Long story short, the outlook in Iran as I’m writing this is a big part of why I see rates rising in August. If we were to suddenly get a complete and decisive end to the war, that’s the one scenario where I see rates falling. But after the ceasefire agreement from June’s memorandum of understanding falling apart, markets might be hesitant to get too exuberant about what could be a “fool me twice, shame on me” situation.

I also mentioned the Federal Reserve as a key piece of the puzzle. The Federal Reserve doesn’t set mortgage rates, but its decisions arguably set the tone for the U.S. economy. The Fed generally raises the federal funds rate (the short-term interest rate the central bankers control) when inflation is overly strong, as it is now.

For context on inflation, the Fed’s goal is a 2% year-over-year increase. The June Personal Consumption Expenditures index, released July 30, came in at 3.7%. That was good compared to May, but remember, in June it seemed like the Iran war was maybe nearing a resolution — July is likely to be worse. Really though, all you need to do is regularly buy groceries or gas to know that inflation’s an issue.

Going into July’s meeting, markets thought there was a decent chance the Fed would raise the funds rate. The arguments for a hike were one, because inflation’s bad, and two, because new Fed Chair Kevin Warsh’s limited communications allowed more room for uncertainty. Overall, though, the odds were on the Fed standing pat, and that was indeed the outcome.

But Warsh’s post-announcement press conference sent the bond market into a tizzy. Warsh continued to drive home the central bankers’ commitment to achieving a 2% rate of inflation. He declined, however, to give any hints about how that might be accomplished, what they’d need to see in order to take action or when any of this could occur. Though Warsh’s stated message was that the Fed is taking inflation seriously, markets read him as unserious.

Bond yields rose during Warsh’s Q&A as markets’ hopes for any concrete plan of action on inflation fizzled. It’s the same dynamic I described above of inflation anxiety turning into demand for higher yields. Unless markets start feeling confident that Warsh’s inflation-fighting talk is more than just talk, bond markets are also likely to keep putting upward pressure on mortgage rates.

And here’s the thing: If words do turn to actions, that’s also going to send mortgage rates higher. Raising the federal funds rate is the Fed’s main mechanism for taming inflation. If it looks like the central bankers are going to hike rates at one or more of this year’s three remaining meetings, that’ll push up mortgage rates, too. Mortgage lenders tend to price in expected changes ahead of Fed decisions.

Can you give me any good news?

I can try. Right now, the market doesn’t look very inviting for home buyers, so folks who are on the fence about a home purchase are likely to stay there. That means less competition for determined buyers who are financially ready to make a move. In markets where inventory’s improved significantly, like major metros in Colorado, Washington and Tennessee, increased supply and lower demand may give buyers more leverage. (If you’re in the Northeast, like me, or New York, my apologies — it’s still rough out there for us.)

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What other forecasters are predicting

Looking at long-term forecasts, there’s not much change on the horizon, but stable mortgage rates wouldn’t be the worst thing. On top of what I just laid out above, relatively stable rates make it easier for potential home buyers to make and stick to a budget.

Last month, Fannie Mae’s economists forecast mortgage rates easing lower in the first quarter of next year — that’s a quarter earlier than their previous forecast. The Mortgage Bankers Association forecast didn’t change in July.

Last month I predicted that mortgage rates would probably remain stable, with the July average coming out pretty even with June. That turned out to be a bit too optimistic, as renewed fighting in Iran spurred rates higher last month. How much they rose depends on whose numbers you’re looking at.

If I measure my prediction against Freddie Mac’s average, I’m not too far off — Freddie’s June average for the 30-year fixed was 6.49%, and July was 6.54%. It’s a few hundredths of a percentage point, no big whoop. Freddie Mac’s rate survey measures borrowers’ actual interest rates on purchase loan applications, so it tends to be more conservative.

But if I’m going off NerdWallet’s rates, which are provided to us by Zillow, I was way off. Our June average was 6.34%, while July came in at 6.50% — a much more decisive rise. Zillow’s data comes from rates that lenders are offering, so these numbers tend to be more reactive.

About the author

Kate Wood is a lending expert and certified financial health counselor (CHFC) who joined NerdWallet in 2019. With an educational background in sociology, Kate feels strongly about issues like inequality in homeownership and higher education, and relishes any opportunity to demystify government programs. Prior to NerdWallet, she wrote about home remodeling, decor and maintenance for This Old House.

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