Thirty-year, fixed-rate mortgages in 2018 have been rising at the fastest pace in 50 years and reached 4.66 percent for the week ended May 24 before dropping to 4.56 percent this week.
However, mortgage rates did not increase proportionally to the federal funds rate determined by the Federal Reserve because they are determined by longer-term economic factors beyond solely the influence of central banks and monetary policy.
Some Fed officials and economists believe that long-term structural factors — such as changes in demographics, a slowdown in productivity growth, and heightened demand for safe assets — will continue to keep the 10-year U.S. Treasuries, a proxy for U.S. fixed-rate mortgage rates, low going forward.
According to the Federal Reserve of San Francisco, the new normal for the natural rate of interest is around 2.5 percent, 2 percentage points below the long-term average, which puts mortgages rates at about 5 percent or slightly higher over time.
Shorter term, through the end of 2018, 30-year fixed rate mortgages are still expected to reach no more than 4.7 percent.
The Federal Open Market Committee has signaled that it would increase the federal funds rate at its June meetings. Markets have most likely already priced in the hike.
Some Fed officials urge caution in how fast it continues raising rates because of inflation expectations, the neutral policy rate, the flattening yield curve, room to grow business investment, and labor markets.
There are concerns that if the rate hikes are too aggressive, they could tip the U.S. economy into recession.