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Mortgage rate forecast for August 2022: Rates react to recession unease

Written by

Erik J. Martin

Aug. 1, 2022

The dog days of summer have arrived, but what’s really got Americans barking up in protest isn’t the sweltering heat; it’s doggone inflation, and for borrowers, higher interest rates to go with it.

Last week, the Federal Reserve hiked the federal funds rate by 75 basis points for a second time. That could send mortgage rates back up in short order — or not. We consulted the pros to learn how current economic and housing market conditions could impact mortgages this month.

A calmer end to summer?

If a recession is indeed coming — or already here — it’s possible that interest rates on mortgages could fall rather than continue the upward track they’ve been on so far this year. In July, that path looked choppy, with the 30-year fixed rate averaging 5.67 percent, according to Bankrate.

Given recession concerns, the benchmark 30-year fixed rate should average 5.35 percent in August, versus 4.5 percent for a 15-year mortgage, according to a forecast from Greg McBride, chief financial analyst for Bankrate.

“Since mid-June, mortgage rates have responded less to inflation data and more to the possibility of an economic downturn or recession,” says McBride. “This wouldn’t be unusual, except it was happening as inflation set a fresh 41-year high.”

The rates on mortgages also haven’t budged much on news of the Federal Reserve’s latest rate increase. That’s somewhat to be expected, as fixed mortgages more closely follow the 10-year Treasury yield.

“August will be an interesting month for interest rates, with the Fed decision in July to raise rates seemingly having no impact so far on raising actual mortgage rates,” says Ralph DiBugnara, president of real estate video series Home Qualified.

DiBugnara anticipates August rates averaging no higher than 5.5 percent and 4.875 percent for 30-year and 15-year fixed mortgages, respectively.

“I believe that a lot of the increases in mortgage rates have been built-in to account for the Fed’s new policy to raise rates regularly in 2022,” says DiBugnara. “As fears of a recession seem to be outweighing fears of inflation, rates have continued to come down. As one example, this has signaled investors to buy more 10-year Treasury notes, which are an indicator for where mortgage rates will head.”

That’s a departure from June, when mortgage rates hit 6 percent. That doesn’t seem likely to happen again this month.

“I think the surge in rates before the June Federal Reserve meeting was largely a response to the higher inflation reading in the June report,” says Selma Hepp, executive of Research and Insights and deputy chief economist for CoreLogic, who expects the 30-year fixed rate to average around 5.5 percent in August.

“Rates have since returned to the 5.5 percent average, as demand for bonds remains strong in light of concerns about the world economy and a higher probability of recession in Europe as a result of the war in Ukraine,” says Hepp.

Don’t rule out a return closer to 6 percent by the end of the year, however. In a recent statement, Lawrence Yun, chief economist for the National Association of Realtors, said “it is possible that the 30-year fixed mortgage rate may settle down at 5.5 percent to 6 percent for the remainder of the year.”

Housing market still competitive, but cooling

Another potential bit of good news for homebuyers: The housing market is beginning to cool, with more listings coming on, and possibly at more reasonable prices.

“Housing markets are showing a clear indication of a tipping point away from overheated early spring conditions, but it’s far from the type of housing market collapse seen pre-Great Recession,” says Hepp. “Nevertheless, while there are fears of uncertainty that come with slowing housing markets, the reality is that many potential buyers are still interested in purchasing a home, which will keep the market competitive and continue to put pressure on home prices.”

There is at least one indicator that buyers could soon find relief: price cuts.

“A higher supply of homes on the market today coupled with softening demand and my expectation for rising mortgage rates will inevitably impact the price of homes significantly,” says Dennis Shirshikov, head of content for Awning, a portal for single-family investment properties. “I expect price cuts on homes as high as 10 percent to 20 percent in the third quarter.”

“We are seeing a lot of price drops for homes on the market, but in most cases these homes were overpriced or too high to begin with,” says DiBugnara. “Sellers were trying to take advantage of the hot market and now are going to price their homes much more competitively if they really want to sell. Buyers now have more options than in 2021, so bidding wars will also be far less frequent.”

Should you hold off on homebuying?

In the market for a home, or eager to unload and move? Still eyeing a refinance? Now’s the time to ask yourself: Should you pull the trigger soon, or kick this can down the road?

“I recommend getting into the market now if you are looking to buy a home,” says Shirshikov. “Get today’s relatively low rate locked in and aim to purchase a house at market price. I believe it will get much harder to borrow in the months ahead. If you haven’t been preapproved and locked in at a rate yet, do it sooner rather than later.”

Before you lock in your rate, confirm with your mortgage lender whether it can be extended (and if so, how much it’ll cost). While you might see more listings now compared to springtime, it could still take some time to find the one.

Don’t push the affordability envelope, either, especially in today’s economic landscape. Even with rates retreating a bit, buyers should “remain within their budget and not stretch beyond it, as market dynamics are moving quickly,” says David Druey, Florida regional president at Centennial Bank.

If you plan to list your home for sale in the coming months, keep your expectations in check.

“Determine a home value that you believe is correct at the market rate and prepare for negotiations, which have not been typical in recent quarters,” says Druey.

If you’re not planning to buy or sell but have been hanging onto a rate you got more than 10 years ago, it might still make sense to refinance to a lower rate, particularly if you want to cash out and plan to remain in your home long enough to recoup the closing costs.

“Remember that, while mortgage rates are higher than a few months ago, they are still at historically favorable levels,” says Hepp. “Also, instead of pursuing a cash-out refi, you may want to take a look at a home equity loan or home equity line of credit.”

That’s because homeowners have lots of equity to draw from thanks to the run-up in home values in the past two years. With a home equity loan, you’ll get a lump sum at a fixed rate. A line of credit (HELOC) typically has a variable rate, which means it can change over time due to factors like Federal Reserve hikes. Either might be more advantageous now than a cash-out refinance, since you’ll get to keep your mortgage as-is.

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