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Mortgage Rates: A Historical Perspective and Future Outlook

For those aspiring to buy a home this year, keeping a close eye on mortgage rates is paramount. Mortgage rates have a direct impact on the affordability of your potential home purchase, and in today's challenging market, understanding their historical context and their relationship with inflation can provide insights into where they might be heading in the near future.


Providing Context to the Current Landscape

Freddie Mac has diligently tracked the 30-year fixed mortgage rate since April of 1971. Each week, they release their Primary Mortgage Market Survey results, which compile mortgage application data from lenders across the nation (as depicted in the graph below):



Examining the right side of the graph, it's evident that mortgage rates have experienced a significant uptick since the beginning of last year. However, even with this increase, today's rates remain below the 52-year historical average. While this historical perspective is crucial, it's worth noting that many buyers have grown accustomed to mortgage rates fluctuating between 3% and 5% over the past 15 years.


This is significant because it explains why recent rate hikes may have sparked sticker shock, despite rates being relatively close to their long-term average. Although many buyers have adjusted to the elevated rates over the past year, a slight dip in rates would undoubtedly be welcomed. To gauge the possibility of such a development, it's essential to consider inflation.


Where Could Mortgage Rates Be Headed in the Future?

The Federal Reserve has been diligently working to curb inflation since early 2022. This is of utmost importance since, historically, there has been a discernible correlation between inflation and mortgage rates (as displayed in the graph below):



This graph underscores the consistent relationship between inflation (depicted in blue) and subsequent mortgage rate movements (shown in green). Observing the left side of the graph, it's apparent that each significant fluctuation in inflation is closely followed by a corresponding adjustment in mortgage rates.


The highlighted section of the graph emphasizes the recent inflation spike, with mortgage rates closely trailing behind. As inflation has moderated somewhat this year, mortgage rates have not mirrored the decline.


In light of this historical pattern, it's plausible that the market is awaiting mortgage rates to respond to the moderation in inflation and begin to trend downward. While predicting mortgage rates with pinpoint accuracy is challenging, the historical connection between inflation and mortgage rates suggests that a decrease in mortgage rates could be in the near future.

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To gain insights into the potential trajectory of mortgage rates, it's valuable to consider their historical trends. There is a clear link between inflation and mortgage rates, and if history is any indicator, the recent easing of inflation may bode well for the future of mortgage rates and your homeownership aspirations.

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