If you’ve been watching mortgage rates lately, you’ve probably noticed something: they’re going the wrong direction again. The Freddie Mac 30-year fixed mortgage rate jumped to 7.28% as of October 1, up from 7.03% just one week earlier. A year ago, it was 6.34%.
There are obviously a lot of moving parts affecting interest rates, but one of the biggest stories right now is oil. As of October 2, West Texas Intermediate (WTI) crude was trading around $98 per barrel. Earlier this year it was around $60. That matters to a lot more than what you pay when you fill up your car.
Oil Works Its Way Through Almost Everything When oil prices increase, the obvious impact is gasoline. But energy costs are embedded throughout our economy. Diesel fuels the trucks delivering products. Jet fuel affects transportation and travel. Petroleum is used in plastics, chemicals, manufacturing and agriculture. Higher energy costs affect construction materials and the cost of moving those materials. Businesses ultimately have to absorb those higher costs or pass them along to consumers.
That’s inflation. And that’s where oil prices start becoming relevant to mortgage rates.
The Federal Reserve has specifically acknowledged the problem. Fed Vice Chair Philip Jefferson recently said that energy prices, including gasoline and diesel, have been the predominant factor behind the recent pickup in headline inflation. He also expressed concern that higher energy prices could spill over into broader and more persistent inflation. The Fed has a 2% inflation target. When inflation stays above that target, or starts moving in the wrong direction, the Fed has fewer options to lower interest rates and may have to raise them.
In September, the Federal Reserve raised the federal funds target range by another quarter point to 3.75%–4.00%. The Fed Doesn’t Set Mortgage Rates This is an important distinction. I hear people say all the time, “The Fed raised rates, so mortgage rates went up.” It’s not quite that simple. The Federal Reserve directly controls very short-term rates. It does not set 30 year mortgage rates. Mortgage rates are much more closely connected to the bond market, particularly longer-term Treasury securities and mortgage-backed securities. But the Fed absolutely influences that market.
If bond investors believe inflation will remain elevated, they generally demand higher yields to compensate them for holding long-term debt. If investors believe the Federal Reserve will have to keep rates higher for longer, or raise them further, that can also push Treasury yields higher.
As of October 1, the 10-year Treasury yield was approximately 5.24%. Higher Treasury yields generally mean higher mortgage backed securities yields, and ultimately higher mortgage rates. That’s how we end up with a 30 year fixed mortgage rate averaging 7.28%. So while the Fed doesn’t directly set mortgage rates, its inflation fight and the bond market’s expectations about that fight, certainly affect them.
Look at What Oil and Mortgage Rates Have Been Doing The chart accompanying this blog is interesting. Earlier this year (pre-war), WTI crude was trading in roughly the $60 per barrel range. As oil moved substantially higher, mortgage rates also began climbing. That doesn’t mean a $10 increase in oil automatically produces a specific increase in mortgage rates. There are too many other economic variables involved.
Employment, economic growth, government borrowing, Federal Reserve policy, inflation expectations and global capital flows all matter. But the relationship has become unusually significant this year. Oil prices and Treasury yields have recently been moving together much more closely than normal as markets price in the inflationary consequences of higher energy costs.
And unfortunately, there’s another problem developing underneath all of this.
The $40+ Trillion Elephant in the Room: Federal Debt
We also have to talk about the national debt. The federal government now has more than $40 trillion of debt, and servicing that debt is becoming increasingly expensive as older, lower-rate Treasury debt matures and has to be refinanced at today’s higher rates. Washington is now spending approximately $1 trillion annually just on interest. Think about that for a moment. Not paying down the debt. Interest on the debt.
The Congressional Budget Office projects federal debt held by the public at approximately 101% of GDP in 2026, rising to about 120% by 2036 under current projections. Even more concerning to me is what happens to interest expense. CBO projects net federal interest costs rising from approximately 3.3% of GDP in 2026 to 4.6% in 2036.
This starts creating a vicious cycle. Higher interest rates increase the government’s interest expense. Higher interest expense contributes to larger federal deficits. Larger deficits require the Treasury to borrow more money. More Treasury securities have to be sold into the market. When you’re trying to sell enormous amounts of debt, investors have to be willing to buy it. And if investors demand higher yields to absorb that additional supply, or because they’re concerned about inflation, deficits and the purchasing power of the dollars they’ll eventually be repaid with. Treasury rates can remain higher than they otherwise would. And once again, higher Treasury yields can mean higher mortgage rates.
We Have Several Forces Pushing in the Same Direction This is what concerns me about the longer term interest rate outlook.
We potentially have several factors reinforcing each other:
Higher oil prices → higher inflation → tighter Federal Reserve policy → higher Treasury yields → higher mortgage rates.
At the same time: Higher interest rates → higher federal debt-service costs → larger deficits and more government borrowing → greater Treasury supply → potentially higher long-term yields.
That doesn’t mean rates can only go up. They won’t. Rates will fluctuate. Oil prices can decline. Inflation can improve. Economic weakness can push investors into Treasuries and bring yields down. The Federal Reserve can eventually reduce short term rates. But I believe the enormous federal debt load changes the equation.
Even when inflation eventually comes down, the structural borrowing requirements of the federal government may keep longer term interest rates higher than they otherwise would have been. That’s an important distinction.
I’m not saying we’ll never see 5% mortgages again. I’m saying we shouldn’t automatically assume that the ultra low interest rate environment we became accustomed to is normal—or that we’re necessarily going back there anytime soon.
What Does This Mean for Real Estate?
Higher mortgage rates obviously affect affordability. A buyer doesn’t purchase a home based solely on its price. They purchase a monthly payment. When mortgage rates rise, the same loan amount produces a substantially higher payment. That reduces purchasing power and can knock some buyers completely out of a price range.
For sellers, that means understanding that today’s buyer may be looking at the exact same house differently than a buyer did when mortgage rates were 5.5% or 6%. It doesn’t mean homes won’t sell. It means pricing, financing strategy and negotiation become increasingly important. Seller credits toward rate buydowns, assumable financing where available, adjustable rate products, temporary buydowns and other financing strategies can sometimes make the difference between a property sitting on the market and getting a transaction together.
And buyers need to look beyond the headline rate. There may be opportunities to negotiate price and terms today that weren’t available in a much hotter real estate market.
Where Do Rates Go From Here? Nobody knows exactly. Oil could drop substantially if geopolitical tensions ease and energy supplies normalize (fingers crossed). Inflation could cool. Economic growth could slow. Any of those developments could bring Treasury and mortgage rates back down.
But the opposite is also true. If energy remains expensive, inflation remains stubborn, and the federal government continues borrowing trillions of dollars while refinancing existing debt at higher rates, there are legitimate reasons for longer term interest rates to remain elevated. That’s why I continue watching oil, inflation, Federal Reserve policy, Treasury yields and federal debt together. They’re interconnected.
And right now, they’re telling us that the path back to substantially lower mortgage rates may not be as simple,or as quick, as many people would like.
If you’d like to discuss what these changing market conditions mean for your home, your buying plans, or your financing options, feel free to reach out. In today’s market, having current information and a sound strategy can make all the difference.
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Chairman – OutWest Marketing Meeting (Real Estate Education)
DRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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