Mortgage rates continue to be a hot topic of conversation and for good reason! Rates have increased since the start of the year, and not by an insignificant amount. Why is this so important? When mortgage rates increase, it means that your buying power decreases. Therefore, timing your home purchase so that you're buying before those rates get sky-high is incredibly important.

So, how do you know where the rates are headed? How are experts making their predictions?

Today we’re pulling back the curtain and sharing some insight into some of the key indicators that will help you get a pulse on where mortgage rates are headed and what that means for your home purchase. 


How To Tell Where Rates are Headed

A great way to get a sense of where mortgage rates are headed is by looking at the 50-year history of the 10-year treasury yield and projecting where the trends are going next. You might be thinking, "I have no idea what the treasury yield is all about." Not to worry! The key factor here is to look at the correlation between how the treasury yield moves and how mortgage rates follow. The graph below from Keeping Current Matters depicts this relationship:

What this data shows us is that the correlation between the treasury yield and mortgage rates is continuing into this year. As of two weeks ago, the treasury yield was 1.81%, which is 1.74% below the mortgage rate reported that same day and is in line with the average spread that we typically see between the two numbers (~1.7).


What Does the Future Hold?

Now that we understand the correlation between treasury yield and mortgage rates, we can forecast what we might see in the future. The Wall Street Journal just surveyed a panel of over 75 academic, business, and financial economists and asked them to forecast treasury yield over the next few years.


The experts predicted that treasury yield will climb to 2.84% by the end of 2024. Taking what we know about the correlation between treasury yield and mortgage rates, that would put rates at about 4.5% in three years. 


Now, it’s important to understand that this correlation should not be used as an exact indicator. Both mortgage rates and the treasury yield are difficult to accurately forecast. Still, having a grasp on this relationship and the current information we have available to us today can help you get an idea of what mortgage rates will look like in the future. Based on the data we have, mortgage rates will continue to rise over the next few years, which is important to understand if you're currently house hunting. 


What Does This Mean In Terms Of Purchasing Power

As mortgage rates increase, so do your monthly payments. Let’s take a closer look at how this all plays out. Let’s say you can afford a monthly mortgage payment (principal and interest) of $1,900. At a 3.00% mortgage rate, that would allow you to purchase a $440,000 home. However, at a 5.00% interest rate, that same payment would only allow you to purchase a $360,000 home. This example demonstrates how waiting can result in less purchasing power and, in turn, fewer options out there.


The graph below from Keeping Current Matters further highlights how mortgage rates can impact your purchasing power. 


Bottom Line

While we don’t have a crystal ball to tell us for certain where mortgage rates are headed, we do have some strong data that allows us to better predict what they might look like over the next few years. By understanding some of the key mortgage rate indicators, you can have a clearer insight into what the experts are predicting and can make an informed decision about the timing of your home purchase!