May Mortgage Outlook: Rates Stable but Braced for Shocks

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Mortgage rates are likely to remain relatively stable in May. There’s no doubt that we’ll have daily ups-and-downs, but a major dive is unlikely to happen. (My apologies to anyone hoping 5% rates would be back on the table anytime soon.)

On the plus side, we’re unlikely to see a spike unless there are major negative developments in Iran. While the ceasefire has kept a lid on that conflict for a while, renewed aggression could alarm markets and push up mortgage rates. Unfortunately, we can’t count out that possibility.

Iran war remains influential

Back in March, we saw mortgage interest rates rise rapidly following the onset of the Iran war. The ceasefire, which began on April 8, brought some calm to mortgage rates as well. In the time since, we’ve only seen rates reacting to big news. That happened at the end of the month, as mortgage rates jumped following headlines about the U.S.’s naval blockade continuing until Iran agrees to a nuclear deal. Iran is set on keeping the Strait of Hormuz closed until the U.S. blockade ends, and it’s unclear which side will budge first.

It’s easy to grasp why those actions would affect gas prices, but mortgage rates might be a bit more puzzling. Here’s how we get from A to B (or really, in this case, A to F — there’s more than one step).

Mortgage rates track the bond market, because when home loans are resold and packaged as investment vehicles called mortgage-backed securities (MBS), they attract similar investors to bonds. As a result, mortgage rates follow bond yields, which you can essentially think of as the interest earned on a bond.

Mortgage rates are always a little higher than bond yields to reflect that MBS are slightly riskier than bonds. While bonds last for a fixed duration and can guarantee a fixed payout, with mortgages there’s always the possibility the loan ends early due to a sale or refinance.

The bond market has had a rough time with the Iran war because the conflict immediately sparked fears of inflation (again, it’s pretty clear how a war in the Middle East could lead straight to higher fuel prices). In an inflationary climate, bonds are less attractive since those fixed payouts won’t go as far. When bonds’ prices fall, their yields rise — the yield is the bond’s annual payout divided by the price, so when the price is lower, the yield is higher. And as bond yields went up in response to the Iran conflict, we saw mortgage rates rise, too.

Again, we did see rates improve in April, as the markets became desensitized to headlines coming out of the Middle East. But big news can still have an impact. If we see mortgage rates make a major move in May, it’ll likely be because of a development in the Iran war.

Don’t forget about the Fed

On the home front, despite anticipation that a new Federal Reserve chair might mean upcoming rate cuts, we’re unlikely to get downward pressure on mortgage interest rates immediately.

The decision had four dissents. That may not sound dramatic, but this is the Fed we’re talking about — the last time four members dissented was 34 years ago. Stephen Miran’s dissent was no surprise, as he has voted for a larger rate cut at every meeting he has been part of. The other three dissents, however, were eyebrow-raising.

Fed governors Beth Hammack, Neel Kashkari and Lorie Logan agreed that holding the federal funds rate steady was the right call, but dissented because they disagreed with the “inclusion of an easing bias in the statement at this time,” according to the Fed’s meeting day press release. The Federal Reserve issues an official statement after each meeting explaining its reasoning for the day’s decision and giving an overview of the economic outlook. The statement’s language varies little from meeting to meeting, so the smallest change in wording can be a big deal.

The dissenting governors objected to the word “additional” in the sentence “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” It may not sound even slightly controversial, but the argument is that “additional” implies “additional cuts,” since the last three changes to the funds rate were cuts.

On top of that, during his post-meeting press conference, current chair Powell made clear that he will remain as a governor once his term as chair concludes. Governors usually step down after their terms as chair end, but Powell explained that he wants to stay on while legal proceedings against the Fed remain unresolved. Powell sticking around also has the effect, however, of barring President Trump from appointing a replacement Fed governor.

Kevin Warsh is expected to be confirmed as the next Fed chair later this month. Warsh repeatedly affirmed in confirmation hearings that he would not bow to the president’s wishes — President Trump has made it extremely clear since returning to office that he wants to see the Federal Reserve lower interest rates. But Warsh has also been making his own case for lower rates, claiming that an AI-driven productivity boom will reduce inflation.

TL;DR: With at least three Federal Reserve governors voicing concerns about inflation, not to mention Powell still in the mix, Warsh could face considerable opposition to rate cuts. If the Fed is not in a cutting mood, that’s one less reason for mortgage interest rates to fall.

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What other forecasters are predicting

In April, Fannie Mae’s economic team raised their 30-year mortgage rate expectations after lowering their predictions in March. The Fannie Mae forecast now more closely aligns with the Mortgage Bankers Association, whose forecast was unchanged this month.

I speculated in my previous column that the difference between the March forecasts was likely because of when they were created, with MBA making its predictions later in the month — and further into the Iran war — than Fannie Mae.

Now both long-term views show extremely modest decreases as the year rolls on; really, these are predictions of rate stability.

Last month I predicted that mortgage rates were likely to keep rising in April, and they did — for the first couple of days. After that, rates eased lower, though not by a ton. Thanks to the last-minute jump described above Freddie Mac’s average 30-year rate ended the month only 16 basis points below where it started. (A basis point is one one-hundredth of a percentage point.)

About the author

Kate Wood is a lending expert and certified financial health counselor (CHFC) who joined NerdWallet in 2019. With an educational background in sociology, Kate feels strongly about issues like inequality in homeownership and higher education, and relishes any opportunity to demystify government programs. Prior to NerdWallet, she wrote about home remodeling, decor and maintenance for This Old House.

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