July Mortgage Outlook: Rates Are Stuck, and We’ll Explain Why

July's mortgage rates are likely to end up roughly where they ended in June. While we could get a temporary dip, rates would be unlikely to stay low. This would be a big enough window for a well-prepared refinancer, but it wouldn't be large or long enough to make a difference to a potential home buyer.

That's because most of the signals currently indicate that we shouldn't expect a low rate environment. So even if mortgage rates were to drop in response to a specific news event, the likelihood is the fall would be short-lived and we'd still end July about where we started.

Why rate relief is unlikely

We say it a lot: The Federal Reserve doesn't set mortgage rates. But keeping the U.S. economy stable is the Fed's job, and so yes, the central bankers' plans and actions certainly influence mortgage interest rates. Right now, there's simply not an argument for the Fed cutting the federal funds rate, which is the influential short-term borrowing rate it actually does control.

We get rate cuts when the Federal Reserve needs to shore up employment. The idea is making borrowing less expensive encourages businesses to expand and hire. But lower rates risk spurring inflation if businesses and consumers get too spendy. Right now, we appear to be in the opposite of this scenario.

After starting the year shaky, the labor market is looking stronger and stronger. The most recent jobs report showed a surprising surge in hiring while the unemployment rate remained steady.

Inflation is a different story. Inflation has been running above the Federal Reserve's 2% benchmark for more than five years, and the Iran war certainly didn't improve that stat. The most recent inflation numbers we got may not be the freshest — last week's Personal Consumption Expenditures data was from May — but it wasn't good, either.

Year-over-year, the overall PCE index showed the rate of inflation increasing 4.1%. Core PCE, which omits food and fuel costs since those tend to be more volatile, increased 3.4% year over year for May. It's another nail in the coffin for rate cuts, and that coffin was already full of nails.

A new era for the Fed

The Federal Open Market Committee meets July 28-29, and according to CME FedWatch, markets are currently predicting about one in three odds of a 25-basis-point increase in the federal funds rate. Those odds increase over the year's three remaining meetings.

That could feel surprising if you'd hoped President Trump's pick to lead the Fed, new chairman Kevin Warsh, would get right to cutting rates. After all, the president has been pushing for lower interest rates more or less since returning to office. But at the central bankers' June 16-17 meeting — Warsh's first as chair — the funds rate was held steady, and there was no indication rate cuts were on the table.

Warsh declined to participate in that meeting's Summary of Economy Projections, a set of anonymized predictions from the central bankers. Overall though, Fed officials' expectations for the target funds rate at year's end rose compared to March.

And in his press conference following the announcement, though he declined to provide anything that could be construed as predictive, Warsh came off as hawkish on inflation. He repeatedly reaffirmed the central bankers' commitment to returning inflation to 2% and made clear that they would "deliver" on the goal.

A less transparent central bank?

But there's an additional wrinkle that could make mortgage rates more volatile in the coming months.

Prior to becoming chair, Warsh had shared his view that the central bankers should say less about their future plans. He reiterated this in his post-meeting press conference, noting that one of the five task forces he's appointing will review Fed communications. The members of the Federal Reserve have always been cagey with public-facing statements, leaving Fed-watchers to parse their word choices. What Warsh is arguing, however, is for fewer statements, period. It's not even clear when he'll next hold a press conference.

With less guidance from the Federal Reserve, we may see more rapid changes to mortgage interest rates. In recent years we've seen mortgage lenders leaning on Fed communications to anticipate Fed actions. By the time the central bankers finally meet and raise or lower the funds rate, mortgage rates have already gradually incorporated the shift in the preceding weeks or months.

If it's less clear whether or when the Fed's going to make a change, we could be coming into a phase where the actual decisions have a more immediate impact. Instead of rates slowly rising or falling ahead of a hike or cut, we could get larger, much more abrupt swings as mortgage lenders react to each Fed action.

For now though, whether it's a bit of a surprise or markets see it coming, we're more likely to get a hike from the Fed this year — and that means mortgage rates are unlikely to fall very far. The best-case scenario for mortgage rates would be the central bankers holding the funds rate steady through year-end.

What other forecasters are predicting

In June, Fannie Mae economists raised their forecast by 10 basis points across the board. (A basis point is one one-hundredth of a percentage point, so that's a tenth of a percent.) Last month they predicted 6.3% average mortgage rates through the end of the year; now they are saying 6.4%. It's not a dramatic increase, but it's one more sign that lower rates aren't likely anytime soon.

The Mortgage Bankers Association didn't alter their forecast, but it was already slightly higher than Fannie Mae's new prediction.

What happened in June

Last month we predicted that mortgage rates would likely move higher as a resolution in Iran remained elusive. As it turned out, rates actually moved lower — but only a negligible amount. The average 30-year fixed mortgage rate was 6.34% in June, just one basis point lower than May's average. While there was day-to-day volatility as mortgage rates reacted to different news events, overall rates were fairly stable.

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Kate Wood writes for NerdWallet. Email: kwood@nerdwallet.com.

The article July Mortgage Outlook: Rates Are Stuck, and We'll Explain Why originally appeared on NerdWallet.