Mortgage rates above 7% are the 'new normal', here's why
High inflation and competition for investor dollars are helping keep longer-term interest rates elevated, economists say.
Everyone seems to agree that mortgage rates above 7% are the new "normal."
The phrase keeps popping up lately in public comments from housing economists, including Lawrence Yun , chief economist for the National Association of Realtors, and Robert Dietz , chief economist for the National Association of Home Builders.
It's a sentiment increasingly reflected in forecasts, too, with major housing groups predicting mortgage rates will remain above 7% well into 2027. Fannie Mae forecasts mortgage rates could average 7.5% in 2027, while the Mortgage Bankers Association expects them to remain above 7% .
That means the 3% or 4% mortgage rates borrowers were used to in the years before 2022 are unlikely to return anytime soon.
"We could definitely see some movement up and down depending on data, but we're just not in the same economic environment we were in during the 2010s or the pandemic," says Jenna Stauffer, a broker and market analyst with Sotheby's International Realty.
Mortgage rates tend to move with the 10-year Treasury yield, which serves as a benchmark because mortgages are typically paid off or refinanced well before their 30-year term. And there are reasons to think those longer-term borrowing costs could remain elevated.
One is persistently high inflation. When inflation remains elevated, investors generally demand higher yields on long-term bonds to compensate for the declining purchasing power of the money they'll eventually be repaid. Inflation, as measured by the Fed's preferred PCE price index, hasn't been below the central bank's 2% target since February 2021 .
But inflation isn't the only factor. The federal government is borrowing heavily , while the artificial intelligence boom is fueling enormous private investment in data centers, power generation and other infrastructure, says Selma Hepp, chief economist at real estate data firm Cotality. Together, that increased demand for capital can put upward pressure on longer-term borrowing costs, she says.
Compared to the 2010s, "we've moved from a world with more capital than investment opportunities to one with tremendous competition for capital," Hepp says. Low inflation, abundant savings and relatively weak demand for capital helped keep mortgage rates low during that period, she says.
Demand for mortgage bonds has weakened, too , putting upward pressure on mortgage rates. Banks have become more reluctant to hold mortgage-backed securities since the 2022-23 rate spike produced steep losses on bond portfolios, says Tom Graff, chief investment officer at wealth management firm Facet. That's because bond prices generally fall when interest rates rise. The failures of Silicon Valley Bank and First Republic also prompted greater regulatory scrutiny of banks' bond holdings, he says.
During the pandemic, the Fed pushed rates in the opposite direction. The Federal Reserve bought large quantities of Treasury bonds and mortgage-backed securities to push longer-term borrowing costs lower, helping drive mortgage rates to historic lows. The Fed has since stepped away from actively buying mortgage-backed securities, says Steve Kaminski, head of residential lending at TD Bank.
With those low-rate conditions no longer in place, "mortgage rates will likely remain elevated for at least the next year," Kaminski says.
Getting mortgage rates back to around 6% would likely require lower inflation, slower economic growth or less pressure from government borrowing to help bring down the 10-year Treasury yield, Hepp says.
Kaminski similarly says getting below 7% would require lower inflation and lower Treasury yields. A weakening economy could also push rates lower as investors seek the relative safety of Treasury bonds, lowering their yields, he says.
Whether that happens is uncertain, which is why Hepp says she doesn't like calling 7% the "new normal," since there's nothing permanent about that particular number. But the low inflation, abundant capital and accommodative Fed policies that helped produce 3% and 4% mortgages are no longer in place, she says.
For would-be homebuyers, that means waiting for significantly lower mortgage rates could be a gamble.
"I don't think we should expect to return to the financial conditions that routinely produced 3% and 4% mortgages," Hepp says.
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