Mortgage rates above 7% are the 'new normal'—here's why - CNBC

Calling mortgage rates above 7% the “new normal” means economists increasingly expect rates around that level to remain common for an extended period. It does not mean rates will stay exactly at 7% or never fall. Rates can still move up or down with economic data. The phrase matters because many borrowers became accustomed to unusually cheap mortgages during the 2010s and pandemic.

Several forecasts point to a prolonged period of higher rates. Fannie Mae expects mortgage rates could average 7.5% in 2027. The Mortgage Bankers Association also expects rates to remain above 7%. The underlying environment has changed, with persistent inflation, heavy government borrowing, and strong demand for investment capital.

The outlook is uncertain. Lower inflation, slower growth, or reduced government borrowing could bring rates down. Still, Selma Hepp says the conditions that routinely produced 3% and 4% mortgages are no longer in place, making a quick return unlikely.

Mortgage rates expected in 2027 are dramatically higher than the rates borrowers saw before 2022. Before that period, 3% to 4% mortgages were familiar. Current forecasts instead place rates above 7%, meaning the gap could be about three to four percentage points. That difference can substantially change what a household can afford to borrow.

Fannie Mae forecasts that mortgage rates could average 7.5% in 2027. The Mortgage Bankers Association expects rates to remain above 7% as well. These projections do not describe one guaranteed daily rate. They describe an expected average or general level over time.

The comparison reflects a broader economic shift. The article says inflation remains elevated, government borrowing is heavy, and private investment is competing for capital. The Federal Reserve has also stopped actively buying mortgage-backed securities. Together, these conditions make the unusually low rates of the 2010s and pandemic less likely to return soon.

When mortgage rates stay above 7%, borrowing becomes more expensive. A buyer financing the same home generally pays more interest and faces a larger monthly payment than with a 3% or 4% loan. If the buyer’s monthly budget is fixed, the higher rate reduces the loan amount that budget can support. That weakens purchasing power.

For example, a household that could comfortably afford a certain payment at a lower rate may need to borrow less at 7% or above. It might choose a less expensive home, make a larger down payment, or delay buying. The key mechanism is the interest rate: a larger share of each payment goes toward the cost of borrowing, especially early in the loan.

The article does not quantify a typical payment increase, but it warns that waiting for significantly lower rates could be a gamble. Forecasts from Fannie Mae and the Mortgage Bankers Association point to rates remaining above 7% into 2027, so buyers may need to plan for higher costs.

The 10-year Treasury yield is a key reference point for mortgage rates because both involve long-term borrowing. Mortgages technically often last 30 years, but borrowers commonly pay them off or refinance well before that term ends. The 10-year Treasury therefore better reflects the period investors expect to hold comparable long-term debt.

When the 10-year yield rises, investors generally demand higher returns from other long-term investments, including mortgage-backed securities. Lenders then typically charge more for new mortgages. When Treasury yields fall, mortgage rates can also ease, although they do not move by exactly the same amount because mortgages carry additional risks and costs.

The article links today’s elevated mortgage rates to persistent inflation, heavy federal borrowing, and strong private investment. Those forces can increase demand for capital and push up longer-term yields. A weakening economy or lower inflation could instead reduce Treasury yields and help mortgage rates fall below 7%.

Mortgage rates could fall if the forces supporting long-term borrowing costs weaken. The article identifies lower inflation, slower economic growth, and less pressure from government borrowing as possible routes. These conditions could reduce the 10-year Treasury yield, which mortgage rates generally follow.

Lower inflation matters because investors would need less compensation for the purchasing power their bond payments may lose. A weakening economy could also lead investors toward the relative safety of Treasury bonds. Greater demand for those bonds would push their yields lower. Reduced government borrowing would lessen competition for capital, while slower private investment could have a similar effect.

Selma Hepp says rates returning to around 6% would likely require some of these changes. Steve Kaminski also says getting below 7% would require lower inflation and lower Treasury yields. The timing is uncertain, however, so waiting for that outcome could be risky for would-be buyers.

During the pandemic, the Federal Reserve pushed longer-term borrowing costs lower. It bought large quantities of Treasury bonds and mortgage-backed securities. Those purchases supported demand for the bonds and helped drive mortgage rates to historic lows. This contributed to the 3% and 4% mortgages borrowers became used to during that period.

The mechanism changed after the pandemic. The Federal Reserve stepped away from actively buying mortgage-backed securities. Without that major buyer, mortgage rates no longer receive the same direct support from Fed purchases. Other forces, including inflation and increased competition for capital, can therefore place more upward pressure on long-term rates.

Steve Kaminski of TD Bank says mortgage rates will likely remain elevated for at least the next year because low-rate conditions are no longer in place. The article does not say the Fed alone determines mortgage rates. Instead, its bond-buying policies were one important force that lowered them during the pandemic and is no longer operating in the same way.

High inflation pushes long-term interest rates upward because investors worry that future repayments will buy less. They generally demand higher yields to compensate for that lost purchasing power. Heavy government borrowing adds another pressure. It increases demand for capital, so borrowers may need to offer more attractive rates to obtain funding.

Strong private investment creates similar competition. The article points to the artificial intelligence boom, including spending on data centers, power generation, and other infrastructure. When government and businesses seek substantial amounts of capital at the same time, investors can demand higher returns. Higher long-term Treasury yields then tend to feed into higher mortgage rates.

This differs from the 2010s, when low inflation, abundant savings, and relatively weak demand for capital helped keep mortgage rates low. The article says the economy has moved from having more capital than investment opportunities to having tremendous competition for capital. That shift may keep long-term borrowing costs elevated.