July Mortgage Rates Forecast: Keeping Pace With the Thermometer

Mortgage rates will probably make a downward turn this year — but not in July. Instead, rates are likely to creep upward this summer or stay about the same.

Forecasting mortgage rates is always an iffy proposition, and that’s especially the case for July because of uncertainty about the trajectory of the inflation rate and what the Federal Reserve will do about it.

The Fed has a goal of reducing the inflation rate to 2%. The central bank made progress in 2022, but inflation’s downward movement stalled in early 2023. The core personal consumption expenditures price index (the Fed’s favored inflation measurement) has been stuck at 4.6% to 4.7% in 2023.

Without decisive improvement on the inflation front, the Fed is likely to raise the short-term federal funds rate at the end of its July 25-26 meeting. Mortgage rates often rise in the run-up to Fed rate increases. That’s the most likely course for mortgage rates in July.

Someday, inflation will decrease, the Fed will ease off on its rate increases, and mortgage rates will drop. But the Fed’s monetary policymakers don’t seem to think that will happen this summer. In their June summary of economic projections, they signaled that they expect to raise the federal funds rate another half a percentage point this year. That probably would take the form of two more rate increases of a quarter of a percentage point each.

An unmistakable downturn in the inflation rate could cause the Fed to rethink its expectation of two rate hikes. It’s possible, but not probable, that this month the Fed will see signs of decreasing inflation. That seems more likely to happen in August or September and not in July.

Fannie Mae predicts that the Fed will continue raising rates “until it is abundantly clear that inflation pressures from the labor market have eased.” But in Fannie’s estimation, it’s scarcely clear that this evidence will show up soon enough to avoid a recession. Fannie expects mortgage rates to rise slightly from July through September, then drop in the final quarter of 2023 as the economy cools.

By contrast, Freddie Mac predicts that the economy will avoid recession as inflation cools and that mortgage rates will remain above 6% all year.

At the end of May, I predicted that mortgage rates could rise through the first half of June, then level off or fall in the second half. That’s not what happened. Instead, mortgage rates fell from one week to the next, with the 30-year mortgage averaging 7.02% in the week ending June 1 and 6.66% in the week ending June 29.