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How high will mortgage rates go? It depends on the Fed’s inflation fight.

Here’s why home loans rushed past 5 percent and what may be in store for buyers and sellers.

Federal Reserve chairman Jerome Powell has set the central bank on a course to raise interest rates. Mortgage rates have already moved sharply higher.Tom Williams/Associated Press

The Federal Reserve has just started lifting interest rates, but mortgage costs have already blasted off.

Last month, the central bank raised its federal funds rate by a quarter-percentage point, after leaving it pinned near zero for more than two years amid the economic turmoil of the pandemic.

Since then, the average national rate on a 30-year fixed mortgage has jumped more than a full point to 5 percent. That’s the highest it’s been in 11 years, and it’s expected to climb more.

It’s been a record-setting sprint upward for the most popular variety of home loan, and the starter’s gun went off even before the Fed made its move. As recently as November, the 30-year rate was an eyelash shy of 3 percent, according to mortgage buyer Freddie Mac.


“We’ve never had as dramatic an increase in as short a time,” said Luke Tilley, chief economist at Wilmington Trust.

Why has the cost to borrow for a house climbed so fast when the Fed is early into its planned series of rate hikes aimed at reining in runaway inflation. Why does the Fed want mortgage rates to rise? How expensive will mortgages get?

Here’s a look at the reasons mortgage costs are rising and what may be in store for anyone who wants to buy or sell or home. Spoiler alert: Experts say the extraordinary expansion of housing prices may slow, but they are unlikely to drop outright.

Mortgage rates aren’t rising in a vacuum

Inflation snuck up on most economists, including those at the Fed, disguised as a temporary byproduct of COVID-related disruptions to the labor market and global product supply chains. But by the end of last year, a sinking feeling had set in: increasing consumer prices would be a problem for a while. In December, Fed chairman Jerome Powell signaled that higher rates would likely be needed soon to cool things down.


Rising interest rates tend to slow the economy — and tame inflation — by making it more costly for businesses to borrow to buy new equipment and hire more employees. They also make it more expensive to buy a house, pay for goods and services on credit, or take out a car loan.

The federal funds rate is the most important lending rate that no real person ever pays. The Fed’s primary tool for controlling the money supply, it’s used by banks on overnight loans to each other — essential to the financial system, invisible to us.

But the funds rate influences, directly or indirectly, a broad range of other lending costs, from business loans to credit cards to how much interest the federal government pays to investors who buy its debt. As the Fed telegraphed its next steps, rates began going up across the board.

On March 16, the Fed made its quarter-point move. That day, Powell also left no doubt that it would require multiple rate increases this year and next to get inflation — stoked even hotter by the impact on food and energy prices of Russia’s invasion of Ukraine — under control. The central bank’s preferred inflation gauge, called the personal consumption expenditure index, hit 6.4 percent in February, more than triple its longer-term target of 2 percent.

That’s when the run-up in mortgage rates shifted into high gear.


Tracking 10-year Treasuries

Mortgage rates are primarily driven by yields on the US Treasury’s 10-year note. The widely followed barometer reflects the financial world’s expectations on the direction of rates, economic growth, and inflation. By extension, so do mortgage costs.

Since the start of the year, the 10-year Treasury yield has risen to 2.84 percent from 1.51 percent — again, in anticipation of the Fed’s tightening plans. Mortgage rates have followed suit.

The rate on a 30-year fixed mortgage in Massachusetts rose to an average of 5.05 percent on Wednesday from 3.3 percent at the beginning of January, according to Bankrate.com. Local rates on 30-year jumbo loans made a similar move, and the Massachusetts average on a 15-year fixed mortgage is 4.2 percent, up from 3.5 percent.

The gain brings pain

Several key reports on the housing market were released this week. All tell a familiar story: high prices that continue to rise and precious little inventory for sale despite this being the prime selling season.

Confidence among homebuilders fell for the fourth straight month in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index released on Monday.

“The [single-family] housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices, and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” said Robert Dietz, chief economist at the homebuilders association.

My colleague Tim Logan reported on Tuesday that the median price for a single-family home in the Boston area rose 9.4 percent to $789,500 in March from a year earlier, according to the Greater Boston Association of Realtors. The increase came as the number of sales fell 7.9 percent.


And on Wednesday, the National Association of Realtors said existing US home sales fell 2.7 percent in March from February, and inventory was down 9.5 percent from a year ago.

The combination of sky-high prices and escalating mortgage rates is expected to take a bite out of the housing market. Consider: the monthly mortgage payment (principal and interest after a 20 percent down payment) on the median-priced house in Greater Boston has increased by more than $710 to $3,410 in 2022. That’s more than $8,500 a year.

Numbers like that have most market watchers forecasting a moderation of price gains but nothing like the bust we saw in 2007. Homes remain more affordable today than they did during the housing bubble, relative to median household incomes.

Investors are betting that the federal funds rate reaches about 2.5 percent by the end of the year, based on financial futures. That’s higher than the Fed’s median projection of about 1.9 percent.

Tilley, the Wilmington Trust economist, believes Wall Street is too pessimistic.

Inflation was already slowing before the Fed boosted its rate, he said, and will ease even more as the central bank tightens further throughout the year.

“The Fed won’t need to raise rates as high as many are expecting,” Tilley said.


That would moderate any further increases in mortgage rates. But without a significant change in inventory on the market, it’s going to be next to impossible to afford a house regardless of where borrowing rates go next.

Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.