Weekly Mortgage Rates Drop to 6.99%, but Don’t Exhale Just Yet

Mortgage rates have been relatively stable after the midterm elections, but recent inflation data hints that this may not last.

Cautious optimism for mortgage rates and affordability

The midterm elections were a big question mark for markets, and mortgage rates were elevated through much of October. Since the results were announced, mortgage rates have hovered around 7% — about 30 basis points below October’s average.

Housing affordability was a key platform issue for many newly elected officials, and some went beyond rate talk to propose ways to expand affordability as a whole.

For example, Sen.-elect James Talarico of Texas wrote on his campaign website that he wants to “create a federal task force charged with helping communities use quality, cost-effective options like factory-built ‘modular’ homes to speed up construction timelines.”

This proposal echoes the goals of the bipartisan legislation that lawmakers passed this summer, which expanded standards and access to financing for manufactured housing.

But inflation data boosts December rate hike odds

We anticipate that mortgage rates will rise as we get closer to the Dec. 8-9 Federal Reserve meeting. Central bankers are overwhelmingly expected to raise borrowing costs, and traders reinforced that forecast after the Bureau of Labor Statistics dropped the Consumer Price Index for October on Nov. 10.

The report showed that inflation grew 0.4% in October, higher than economists’ predictions of 0.3%.

Inflation has remained above the Federal Reserve’s 2% target since 2021, even after the central bank raised the federal funds rate in September. The federal funds rate is the interest that banks pay to borrow money overnight, which is how they pay for investments like mortgages. It’s also the main tool in the Fed’s kit for supporting a healthy economy through monetary policy.

In theory, when the federal funds rate goes up, inflation should come down. Mortgage rates are very likely to rise before a federal funds rate hike, since lenders adjust ahead of time when they anticipate higher costs.

So ... when will mortgage rates come down?

Probably not soon, since it’s so likely that the Fed will raise borrowing rates in December. But be on the lookout for headlines like these, which could lead to lower mortgage rates:

Iran war winds down. Democrats now have a majority in both houses of Congress, and Rep. Hakeem Jeffries of New York — expected to become the new Speaker of the House — has affirmed that ending the war is one of the party’s chief priorities.

“We have to end the reckless and costly war of choice. This is a war that we should have never gotten into,” Jeffries told NY1 on Nov. 11. Any perceived successes on this front could potentially lead to falling mortgage rates, since the war with Iran has been such a major driver of inflation.

AI profits soar. AI companies have been borrowing enormous amounts of cash. Goldman Sachs projects debt associated with hyperscale data centers to reach $420 billion by 2027. These firms represent 40% of credit increases across the industry.

This borrowing has driven up bond yields, and, consequently, mortgage rates. If these businesses start to generate real profits, they could use more of their own cash reserves and borrow less.

Inflation falls. If inflation drops (which would be the Fed’s goal with a federal funds rate hike), so would mortgage rates. Lower inflation would make it cheaper for mortgage lenders to generate loans, and would make it less likely that the Fed would have to raise rates again later.

The article Weekly Mortgage Rates Drop to 6.99%, but Don’t Exhale Just Yet originally appeared on NerdWallet.