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If you’ve seen contradictory headlines about mortgage interest rates today, that’s because rates are in an unusual spot. Where rates have been, where they are right now, and where they could go are three separate, but related, stories.
Let’s start with where rates have been. The average rate on a 30-year fixed-rate mortgage rose 13 basis points to 6.24% APR in the week ending May 7, according to rates provided to BW by Zillow. (A basis point is one one-hundredth of a percentage point.) We calculate our weekly average using daily APRs recorded over the last five business days.
Where mortgage rates will head next is the big question. In the immediate future, there’s a lot riding on the situation in Iran. But if we’re looking at the longer term, the health of the U.S. economy may be the bigger factor.
Why Iran matters to mortgage rates
Daily mortgage rate movement has been driven by the Iran war since its inception. It’s not the easiest path to follow, but let’s break it down.
This is the main reason why mortgage rates are in such a precarious position. Earlier this week, when it looked like the U.S. plan to guide ships through the Strait of Hormuz might renew active fighting, the bond market recoiled and mortgage rates spiked.
Now with Iran considering a U.S. proposal to end the war, markets are ebullient and mortgage rates have taken a substantial dive. But it’s not over yet. Iran continues to push for control over the Strait of Hormuz, and President Trump has threatened military action if talks break down. Renewed hostilities would, among other things, send mortgage rates right back up.
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What the longer term could hold
For a longer-term perspective on mortgage rates, we can look to the U.S. economy’s overall trajectory. That means talking about the Federal Reserve.
The primary factor influencing economic decisions is the federal funds rate, a short-term borrowing rate controlled by the Federal Reserve. Inflation has been on the rise, with the Fed aiming for a core rate of 2%, excluding food and fuel prices. Recent data from the Bureau of Economic Analysis revealed core inflation at 3.2% in March, indicating a need for action to bring it back in line with the target.
To combat inflation, the Federal Reserve typically raises the funds rate to curb spending by businesses and consumers. However, dissenting voices at the Fed’s recent meeting suggest a cautious approach to rate hikes. Despite concerns about inflation, the job market has shown resilience with strong hiring numbers in March and April. The upcoming jobs report will provide further insight into the state of employment and its impact on the economy.
A robust job market is positive news, although it may lead to higher mortgage rates. Conversely, rising unemployment could prompt the Fed to consider rate cuts to stimulate economic growth. While the Federal Reserve does not directly set mortgage rates, changes in the funds rate can influence borrowing costs. If inflation remains a concern but the job market stays strong, interest rates are likely to remain elevated.
Kate Wood, a lending expert and certified financial health counselor, provides valuable insights into economic trends and policy decisions. With a background in sociology, Kate is passionate about addressing issues like homeownership inequality and higher education challenges. Her expertise in government programs and financial literacy makes her a trusted resource for navigating complex economic landscapes.