October mortgage rates will continue to rise, haunting home buyers

(NerdWallet) - Mortgage interest rates are likely to keep on rising in October. Projecting the trend for mortgage rates this month isn't particularly tricky, but it doesn't look like there'll be any treats, either.

While we don't face the specter of another Federal Reserve meeting until November, the central bankers' 75-basis-point rate increase in late September, coupled with their latest round of predictions for interest rates, should be more than enough to spook mortgage lenders. What's less clear is whether lenders will front-load the anticipated increases by rapidly ramping up rates in October or if we'll see a more gradual ascent.

Federal Reserve actions make mortgage rates jump

The Federal Reserve may not yet have scared inflation into submission, but it has undoubtedly gotten a reaction from the housing market. Mortgage interest rates have increased ahead of each Fed meeting in 2022, trending upward even before the first increase to the federal funds rate was announced in March.

The run-up to the September meeting saw a significant jump, with 30-year fixed-rate mortgages surpassing and then staying above 6%. Arguably, this was mortgage lenders getting out in front of the Fed. An aggressive 75-basis-point increase was expected, and some had even considered a 100-basis-point hike a real possibility.

In addition to its usual announcement, the Federal Reserve issued a Summary of Economic Projections after the September meeting. These predictions come out four times a year; the last one was back in June. The strategy grew considerably more aggressive over the summer, forecasting that the federal funds rate — currently 3% to 3.25% — will hit roughly 4.4% by year's end and go even higher in 2023. In June, the predicted 2022 year-end number was 3.4%, which two more rounds of rate hikes in November and December will easily pass.

Though mortgage interest rates aren't directly tied to the federal funds rate, increases to that rate make all types of borrowing — including getting a home loan — more expensive.

Affordability worsening even as prices start to fall

This rising rate environment is sending chills down the spines of many potential home buyers, even as home prices show signs of softening. Though year-over-year increases continue, as of August, the median existing home price has dropped for two months running, according to the National Association of Realtors. However, the additional interest financed buyers have to pay potentially wipes out any benefit from lower prices.

To borrow $300,000 at a 6% interest rate, a buyer would be looking at monthly principal and interest payments of almost $1,800. At the beginning of 2022, when interest rates were around 3.5%, monthly payments on a $300,000 mortgage would have been just under $1,350. The same loan would now cost roughly $450 more per month.

The rising cost of borrowing is pushing down demand, as the Fed had hoped, creating slightly less competition in some markets. There's still a shortage of available homes. However, if these trends continue, we could see a housing market that favors buyers before the year ends, according to Black Knight, a mortgage and real estate analytics company.

What happened to mortgage rates in September

Mortgage rates rose each week in September. Interest rates for 30-year fixed-rate mortgages had a brush with 6% back in June, but last month they quickly went north of 6% and stayed there. Other loan types saw increases, too — interest rates on 15-year fixed-rate mortgages and 5-year adjustable-rate mortgages, for example, have been above 5%.

Our September forecast predicted that rates for fixed-rate mortgages would "remain fairly stable" for the first three weeks of the month, potentially rising following the Fed's announcement on the 21st. Instead, that rise started soon after Labor Day, as those weeks saw Federal Reserve officials making public comments about their commitment to fighting inflation with rate hikes, plus a report from the Bureau of Labor Statistics showing that while the rate of inflation had slowed, it was still near 40-year highs.