US mortgage rates could surge to 8.5% as inflation rages: economist

Surging US mortgage rates could shoot through a critical threshold and soar to 8.5% in the wake of another alarming inflation report for September, according to a prominent economist.

Federal data released Thursday showed inflation ran at a hotter-than-expected 8.2% in September. The Federal Reserve is all but guaranteed to implement more sharp interest rate hikes in response — a policy move that will lead mortgage rates to test highs not seen in more than two decades.

Mortgage rates hit a 20-year high this week, with the average 30-year fixed loan hitting 6.92%, according to Freddie Mac. A looming jump above 7% would erase a key psychological barrier and likely cause rates to head toward a new threshold of 8.5%, according to Lawrence Yun, chief economist for the National Association of Realtors.

“Today’s inflation rate report is going to test that 7% level,” Yun said during a presentation at the National Association of Real Estate Investors in Atlanta on Thursday, according to Bloomberg. “Once it’s broken, the next level of resistance is 8.5%, which would be another big shock to the housing market.”

Yun based his prediction on an analysis of mortgage rate trends and identified 8.5% as the next key level of resistance for the market. In other words, an 8.5% average mortgage rate is the next level at which the market could retrench in the coming months.  

Mortgage rates have more than doubled since the start of the year — exacerbating an affordability crisis that has driven many prospective homebuyers to wait for conditions to improve. Home prices have begun to fall in many markets, while the volume of mortgage applications and other housing activity has slowed.

“Once one army makes a breakthrough, there’s a huge advance,” Yun said in regard to mortgage rates, according to Bloomberg.

Earlier this week, Freddie Mac chief economist Sam Khater noted mortgage rates have hit their highest since April 2002 and that the “next several months will undoubtedly be important for the economy and the housing market.”

“We continue to see a tale of two economies in the data: Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously,” Khater said.

Top Fed officials, including chair Jerome Powell, have noted a major slowdown in the housing market is underway as interest rates rise.