Mortgage rates forecast: Could rates hit 7% again by 2027 amid high inflation?

Mortgage rates could potentially reach 7% again by 2027 if high inflation persists and the U.S. government continues to borrow more money, driving bond yields upward. Currently, the forecast for the average 30-year fixed mortgage rate in 2027 is around 6.05%. However, there is a risk that rates could rise to 7% due to factors such as high inflation and increased government borrowing, which would push bond yields higher.

The 10-year U.S. Treasury yield is a key indicator for mortgage rates, and they typically move in the same direction. Mortgage rates often exceed the 10-year Treasury yield because lenders add an extra amount to cover their risks. Economists predict that the 10-year Treasury yield will gradually decline in the coming years. While some forecasts anticipate rates falling back down to 6% and then falling further, another scenario suggests that rates could climb back up to 7% if inflation remains high and government deficits lead to higher Treasury yields.

This bear case assumes the spread could widen to about 2.4 percentage points due to market volatility and supply pressures for mortgage-backed securities. In this scenario, mortgage rates could reach around 7% by 2027 but are expected to fall back to around 6.6% by 2030. A more optimistic economic scenario, where the Federal Reserve successfully brings inflation back to its 2% target without causing a recession, could lead to mortgage rates falling closer to 5% by 2030.

The analysis does not predict mortgage rates falling below 3% over the next five years, as such a drop would likely only occur in the event of a significant economic shock similar to the Great Recession or the COVID-19 pandemic.