Could we really see 9% mortgage rates over the next 12 months? What is going on here? Well, right before I recorded today’s episode of the HousingWire Daily podcast, I had a series of messages asking about a CNBC segment talking about 9% mortgage rates. I went and looked at the video, and my friend Selma Hepp, chief economist at Cotality, talked about how the worst-case situation for rates could lead to 9% rates.
Part of Selma’s worst-case scenario includes mortgage spreads getting worse, which I discussed on this episode of the HousingWire Daily podcast.
For this article, I want to keep it simple and look at whether 9% mortgage rates are possible, what would need to happen to see that increase and why I think it’s hard to get that high.
To get 9% rates, we would need:
1. A super bullish economy
To get 9% mortgage rates, the economy has to be on fire for the next 12 months. Economic growth has to at minimum be between 5%-7% on nominal terms, not adjusted to inflation, and there can’t be any slowdown in consumption or weakness in the labor market.
2. The Iran conflict to rage on for another 12 months
For 9% rates, oil prices would need to stay elevated; they can’t trade between $82-$67, which I deem to be acceptable to the Fed and the markets. That means the conflict has to continue and the market has to believe no deal is coming.
3. The Fed to stay hawkish
The Fed staying hawkish and hiking rates beyond what the market expects is a key factor for 9% mortgage rates. As we can see below, the history of rate hike cycles and mortgage rates isn’t a positive story.
The 10-year yield would need to rise above 6% and mortgage spreads would need to widen beyond what we see today. The math isn’t there for 9% mortgage rates with the 10-year yield under 6% and mortgage spreads where they are today.
Conclusion
I know a lot of people in real estate are sick of higher mortgage rates and the bond market going nuts, so a CNBC headline about 9% rates just feels like kicking someone when they’re down. However, Selma didn’t say 9% rates were her base case; she talked about many variables that would need to occur for that to happen. What I described above is what I would need to see to entertain mortgage rates at that level and I don’t believe those three variables can all continue. Even getting to 8% is difficult, as I wrote about here.
After the midterms, it will be very hard for President Trump to continue this conflict for another 10 months without the Republican Party pushing back — and that’s assuming the Democrats don’t take back the House and the Senate.
