The consensus around mortgage rates keeps shifting. Earlier this year, most experts expected the U.S. economy to fall into recession and mortgage rates to dip back into the 5 percent range.

The economic reality has played out differently. Mortgage rates are still close to 7 percent, and with the Federal Reserve signaling it will resume rate hikes at its July 26 meeting, housing economists expect mortgage rates to hold steady — some ticking up or down, but unlikely to fall substantially.

“Mortgage rates have been inching down over the past couple of weeks,” says Lisa Sturtevant, chief economist at Bright MLS, a real estate listing service in the Mid-Atlantic region. “I expect they could bump around a bit in July but will generally be in the 6.5 percent range the rest of the summer.”

One primary driver of mortgage rates this month: inflation and the central bank’s response to it.

What happened to mortgage rates last month

Mortgage rates were quite volatile in 2022, surging past 7 percent far faster than anyone predicted. Mortgage rates calmed some in 2023, with the average rate on a 30-year fixed loan at 6.91 percent as of June 7, according to Bankrate’s weekly national survey of lenders.

Rates retreated slightly throughout the month, reaching 6.84 percent in the final two surveys of June.

“Mortgage rates have been rangebound since mid-May, and until the core inflation rate posts a meaningful decline, we’re unlikely to see a material drop in mortgage rates,” says Greg McBride, Bankrate’s chief financial analyst. “At the point where core inflation gets better, mortgage rates will, too.”

Not long ago, mortgage experts were calling for rates to fall all the way to the low-5 percent range this year. Instead, the resilient economy means mortgage rates have held strong.

“Mortgage rates are remaining above levels we anticipated earlier this year as inflation pressure has persisted and consumer spending remains robust,” says Selma Hepp, chief economist at CoreLogic, a real estate data and analytics firm.

At the point where core inflation gets better, mortgage rates will too. — Greg McBride, Bankrate Chief Financial Analyst

The driver rate watchers are looking at now

The major factor moving mortgage rates is inflation, and what the Federal Reserve will do at its July meeting.

In May, the official inflation rate cooled to 4 percent. That was well below the 2022 peak of 9.1 percent, but it’s still well above the Fed’s official target of 2 percent. As a result, nearly everyone expects the central bank to resume rate increases at its meeting later this month.

“The Federal Reserve has been clear that inflation is still hotter than desired, and additional rate hikes are on the table,” says George Ratiu, chief economist at Keeping Current Matters, a real estate marketing firm. “Based on the central bank’s forward guidance we can expect two more rate increases in the months ahead.”

While the Fed doesn’t directly control mortgage rates, its moves set the overall tone for borrowing costs. In recent testimony to Congress, Fed Chairman Jerome Powell hinted he favors further rate increases.

Another wildcard is the overall angst among investors and lenders, uncertainty that is showing up in the gap between 30-year mortgage rates and their closest proxy, the 10-year Treasury yield.

This interval, known to economists as “the spread,” typically runs between 1.5 and 2 percentage points. If the 10-year yield sits at 4 percent, for example, the 30-year fixed mortgage rate should track close to 6 percent.

However, the spread has jumped to more than 3 percentage points — the highest level since the scary days of 2009, according to Bankrate research.

What the rate picture means for homebuyers, sellers

While the housing market has cooled in recent months, no crash seems imminent. Instead, home prices have held steady as demand for properties continues to outpace the supply of homes for sale. That’s good news for sellers, not so good for buyers.

“For homeowners who need to make a move due to changing life stages, the current market offers the benefit that a sale is likely to result in an attractive price,” says Ratiu. “Many would-be sellers who worried about last year’s price correction are seeing neighbors fetch competing offers and solid closing prices.”

Buyers, on the other hand, need to come to terms with the market’s new reality. Mortgage rates are unlikely to fall, says Erin Sykes, chief economist at Nest Seekers International, a real estate brokerage.

“I expect mortgage rates to more or less stay stable though the rest of the year,” says Sykes. “Watching rates on a daily basis is like waiting for a pot to boil. Small adjustments in rates should not affect your motivation to purchase a home.”