Mortgage Rates Projected to Stay Above 7% Following ‘Tough’ Inflation Figures

Inflation rose by 3.7% in September, according to today’s consumer price index report, which is a higher reading than the 3.6% economists had forecast. Core CPI, which gives economists a look at underlying inflation by excluding volatile food and energy prices, also outpaced expectations at 2.6% annually, above the forecast of 2.5%.

Prices rose 0.6% month-over-month, in line with expectations but higher than the 0.4% monthly increase reported in August.

Once again, inflation was driven primarily by higher energy costs as a result of the U.S. war in Iran. Overall energy costs rose 5.2% from the month before and are 20.4% higher than they were a year ago. The Federal Reserve Bank of Dallas projected in April that the conflict could add 0.2 to 1.8 percentage points to baseline inflation by the end of 2026, depending on the severity of oil supply disruptions.

Inflation, particularly core inflation, is running well above the Fed’s 2% target, which has implications for the central bank’s future rate decisions.

Jake Krimmel, senior economist at Realtor.com, says that while today’s report probably doesn’t change the likelihood that the Fed will hold rates steady at its October rate-setting meeting, the latest inflation figures “all but guarantee a hike by December.”

However, Fed hikes alone don’t tell the whole story for housing. Mortgage rates follow the yield on 10-year Treasury notes, not the federal funds rate. The 10-year Treasury yield is influenced by many factors, including expectations for inflation and future Fed rate policy decisions.

Treasury yields did rise in the immediate aftermath of the report, which does imply upward pressure on mortgage rates.

Additionally, it’s not just elevated mortgage rates to consider when thinking about inflation. Today’s report is “a tough print for housing” as it impacts affordability “on two fronts,” says Krimmel.

“On financing, stickier inflation and a Fed headed toward more hikes means mortgage rates are unlikely to come down anytime soon. On real wages, earnings growth of 3% now trails 3.7% inflation, so buyers’ paychecks are losing ground just as monthly payments climb.”

Most economists expect that mortgage rates will stay high in 2026 – and through 2028. In its latest forecast, the Mortgage Bankers Association, an industry trade group, predicts that 30-year mortgage rates will stay above 7% for the next several years as Federal Reserve policymakers contend with stubborn inflation.

It’s not just Fed policy keeping mortgage rates uncomfortably high. Remember that mortgage rates track the yield on 10-year Treasury notes, and those bond yields are elevated due to a number of complex economic and geopolitical factors.

The U.S. war in Iran is impacting oil supply and keeping consumer prices elevated, which drives yields higher as investors demand better returns to offset the effects of inflation. The conflict also costs the government money, which leads to increased bond issuance and a higher supply of federal debt.

On top of that, the artificial intelligence boom is increasing corporate debt issuance, which competes with U.S. Treasury bonds for investors and drives yields higher to attract them. Companies must borrow money to fund the rapid construction of data centers that support the computing needs of ever-evolving AI models.

Given the current economic conditions, it’s unclear when Treasury yields and mortgage rates might come down. The MBA expects that rates will dip below 7% in 2029, when they will average 6.9%. That’s a long time to wait for a small decline in borrowing costs. Those in the market for a home might be tired of waiting for rates to fall before making a move.