The average U.S. long-term mortgage rate has inched up to 6.93% this week, marking the fourth consecutive increase, according to Freddie Mac's Primary Mortgage Market Survey (PMMS). This upward trend comes as a result of several factors contributing to the recent changes in mortgage rates.



Factors Driving Mortgage Rate Changes

1. Increased Demand for Mortgage-Backed Securities (MBS): As the economy improves and investors seek higher yields, there has been an increase in demand for MBS, which in turn drives up mortgage rates.
2. Higher Yields in the Bond Market: The yield on 10-year U.S. Treasury notes has been rising, influencing the yield on mortgage-backed securities and, consequently, mortgage rates.
3. Widening Yield Spread: The premium spread between 10-year U.S. Treasury notes and mortgage rates has been increasing, reflecting a lack of buyers for mortgage-backed securities. This wider spread contributes to higher mortgage rates.
4. Inflation and Economic Growth: As the economy recovers and inflation remains elevated, investors demand higher yields on MBS, which leads to higher mortgage rates.
5. Changes in Monetary Policy: The Federal Reserve's actions, such as raising interest rates or adjusting its bond-buying program, can influence long-term mortgage rates.

Impact on Affordability for Potential Homebuyers

The recent changes in mortgage rates have a significant impact on affordability for potential homebuyers. As mortgage rates have increased, the monthly payments for homebuyers have also risen, making it more challenging for them to qualify for a mortgage or to afford the same home they could have purchased at lower interest rates. This is evident in the slowdown of existing home sales, which reached one of the lowest annualized rates on record in September 2024, at 3.84 million units. The lack of inventory and the high mortgage rates have led many existing homeowners to choose not to sell their homes, as they would have to take on a new mortgage at a rate close to double the average rate they currently have.



Expected Trajectory for Mortgage Rates

Based on the information provided, mortgage rates are expected to remain relatively stable or potentially decrease in the coming months. Here's why:

1. Historical Context: The long-term average for mortgage rates is around 7.73% (Freddie Mac data from 1971 to 2024). The current rate of 6.93% (as of January 2, 2025) is lower than this long-term average, indicating that rates could potentially decrease to align with the historical trend.
2. Federal Reserve Actions: The Federal Reserve has been implementing rate cuts, which could lead to a decrease in mortgage rates. In November 2022, the Fed cut rates by 25 basis points, and there is optimism that further reductions could occur in 2025, which would likely impact mortgage rates.
3. Market Dynamics: The recent trend of mortgage rates has been volatile, with periods of decline followed by increases. However, the overall trajectory has been downward since the peak in October 2022. This suggests that the market may continue to trend downward in the coming months.
4. Economic Indicators: Inflation has been a significant driver of mortgage rate increases. However, if inflation begins to ease, as some economists predict, this could lead to a decrease in mortgage rates. Additionally, if the economy slows down, the Federal Reserve may implement further rate cuts, which would likely impact mortgage rates.

While it's difficult to predict the exact trajectory of mortgage rates with certainty, the combination of historical context, Federal Reserve actions, market dynamics, and economic indicators suggests that mortgage rates could potentially decrease or remain relatively stable in the coming months.