Housing Notes: AI Promised the Future and Delivered a 7.4% Rate

Mortgage rates jumped to their highest in three years

When we bought our first house in the 1990s, our mortgage rate was 8.25 percent, down from 13 percent in a fairly short order. We were giddy about having access to “free money” on top of winning a 3-way bidding war. In fact, in our Connecticut homeownership experience (after all, the state accounts for 1 percent of the US population and is known for its nutmeg and cranberries), we won each home through a multi-way bidding war or by paying full retail. That’s because mortgage rates have been falling over the past 3 decades. But that era is over, and rates have been rising.

But over the past month and a half, mortgage rates have spiked, rising for seven consecutive weeks from 6.66 percent in late August to 7.40 percent last week. My take on 7.4 percent today is that it feels much higher than 8.25 percent did in the mid-90s. Probably because rates were falling back then and are rising now.

About a year ago, rates jumped similarly, and around this time, roughly two years ago, we saw the same pattern. These recent fall markets seem to be when rate growth accelerates as the macro economy stays on the path to higher and higher interest rates, as unforced errors in federal policies like tariffs, energy prices, a new Fed Chair (makes us wonder about constant political influence from the White House), and even more tariffs continue to be presented regularly (and Canada!)

The upward shift began immediately after the Iran War started on February 28, since transportation costs affect most consumer goods. But why the recent surge?

A bond market selloff, thanks to AI?

Rates have jumped because several pressures hit the bond market all at once. The Fed hiked rates in mid-September, and markets expect another hike before year-end; Fed Chair Warsh reportedly suggested a higher-for-longer stance rather than further hikes after that.

While I’m not sure how this works technically, it contributed to a bond sell-off, and mortgage rates are tied to bond yields. A bond sell-off means prices drop as people dump their bonds. When bond prices drop, yields rise, and since mortgage rates are tied to them, mortgage rates rise.

Investors have worried that the Fed could give in to political pressure from the White House, since the President is again trying to remove a Fed governor for reasons unrelated to the economy and is constantly pressuring the Fed Chair to cut rates. And at the same time, the selloff went global. A selloff also occurred in Europe as borrowing costs jumped and Japan’s 10-year yield hit its highest level since 1996. As a result, Japan no longer supplies cheap capital to the U.S. through a yen carry trade, which I’ve mentioned before. The “yen carry trade” is something I admit I don’t fully understand. U.S. investors borrow the yen and use it to invest in other currencies for a higher yield. But if the yen rises, returns can take a hit.

At home, heavy U.S. government borrowing in the past two years, which has pushed the national debt to a record $40 trillion and federal debt near 120 percent of GDP, plus AI investment and data center construction, are adding to capital demand. The Iran war pushed up oil prices and inflation, which Bankrate calls its main driver. Together, these factors just sent the 10-year Treasury to its highest level since 2002, and the 30-year mortgage rate followed, reaching 7.4 percent.

What AI means for mortgage rates

The economy is leaning on AI spending to keep growing, and big tech is paying for it by selling bonds. The government is also selling record amounts of bonds to cover deficits and the costs of the Iran War. Investors can only buy so much, so both must offer higher interest rates to attract buyers, and those higher bond yields push up mortgage rates and other borrowing costs.

If investors lose faith that AI will pay off, AI investment spending would drop, growth would slow, and the overall economy would slow as well. In that scenario, bond buyers would likely shift toward safer assets such as Treasuries, pushing their prices higher and yields lower. The Fed, now hiking because inflation is elevated, would probably cut rates once weak growth and rising unemployment outweighed inflation. Lower rates would then help borrowers, including homebuyers.

This is just my theory, based on my skepticism about the future revenue AI would need to deliver to give investors a reasonable return, given its runaway costs (+78% from 2025 to 2026). If inflation stays high, the Fed would be stuck between weak growth and rising prices. If worries about government debt and Fed independence continue to dominate macroeconomic conversations, the Fed could cut short-term rates while long-term yields stay high. Mortgage rates follow the long end, so Fed cuts might not bring them down much if at all.

Final thoughts

Mortgage rates have risen seven straight weeks to 7.40%, a three-year high. It started with oil-driven inflation from the Iran War. Then a bond selloff followed, fueled by the Fed’s September hike, concerns about Fed independence, rising global yields, and record borrowing by Washington and big tech. That pushed the 10-year Treasury to its highest level since 2002, and mortgage rates followed. An AI bust could slow the economy and bring rates down, but if worries about inflation, debt, and Fed independence persist, Fed cuts may do little for mortgages.

The bottom line is that mortgage rates have moved beyond the Fed’s control. They now depend on whether bond investors can trust Washington’s finances, the Fed’s independence, and the AI boom. outcome. Until that trust returns, homebuyers’ best hope for relief may be an economic slowdown nobody wants.

The Actual Final Thought – New Yorkers walk the walk for blocks and blocks.