Homebuyers waiting for mortgage rates to come down might have to wait a little longer.

Mortgage interest rates aren’t likely to drop until the U.S. Federal Reserve stops hiking its own short-term interest rates. It was looking likely that the Fed would end its rate hikes as inflation has fallen in recent months. But after Wednesday’s inflation report showed that inflation jumped to 3.7% year over year in August, blowing past expectations, it’s a toss-up on whether the Fed’s rate hikes are finished.

When the Fed raises its rates, mortgage rates often move in the same direction.

Mortgage rates are now the highest they’ve been since 2002. They averaged 7.12% for 30-year fixed-rate loans last week, effectively putting a freeze on the housing market. Buyers can’t afford to buy, and sellers don’t want to move up or down into new homes and give up their ultralow mortgage rates.

“Because we don’t know how the Fed is going to react, it’s impossible for us to even guess what’s going to happen with interest rates,” says David Stevens, CEO of Mountain Lake Consulting, which provides consulting services to the mortgage industry. Mortgage rates “could bounce around the 7s, they could bounce around the 8s, they could bounce around to the high 6s. It could go up a quarter, it could go down a quarter, it could stay flat.”

The Fed is meeting next week to decide whether to jack up its rates again. Even if it chooses to pause this month, it might increase rates at its next meeting this fall.

The effects of the Fed’s actions, higher mortgage rates, have dramatically cooled the housing market, which was one of its aims. Prices surged to record levels during the COVID-19 pandemic and kept rising at a rapid clip. Prices have now stabilized, albeit at a very high level, thanks to higher mortgage rates. But it’s come at a high cost.

The shortage of homes for sale has hit crisis levels as homeowners hold off on selling. Bidding wars and offers over the asking price are returning to the market as the intrepid home shoppers still in the market compete for a very limited supply of homes for sale. And the higher mortgage rates plus the high prices have priced scores of first-time buyers out of their dreams of homeownership.

The higher mortgage rates go, the more would-be homebuyers can no longer make the math work. Mortgage payments are now about 14% more expensive than they were a year ago—and a staggering 88% more than they were two years earlier, according to a Realtor.com® analysis. (The calculation was based on median list prices in August 2021, 2022, and 2023 and the most recent weekly mortgage rates on 30-year fixed-rate loans from Freddie Mac.)

First American Economist Ksenia Potapov believes the latest inflation data will lead the Fed to boost rates one more time.

“As a result, mortgage rates will likely remain in the 6.5% to 7.5% range through the end of the year, which means affordability will remain a challenge for many homebuyers,” she says.

Stevens is less certain.

“Mortgage rates have been hugely volatile. They continue to surge higher than any of us expected,” he says. “Until the Fed is done raising rates and indicates that with certainty, we’re going to continue to have mortgage rate volatility.”

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