This has not been a friendly year for mortgage rates.

According to Freddie Mac’s Primary Mortgage Market Survey, the average 30-year fixed rate ended the second quarter at 6.71%, jumping from 5.78% a year ago and just 3.11% during the first week of 2022. In an affordability-challenged market, many would-be homeowners are stuck on the sidelines, waiting for rates to dip back into the 5s.

In order for rates to fall below 6%, Austin Bates, branch manager at VIP Mortgage, believes the Federal Reserve needs to see continued evidence of lowering inflation and a break in the labor markets.

“Rates have remained stubbornly high through the first half of the year, contradicting a lot of industry estimates that we might be in the 5s by this time,” he says.

“In my opinion, the Fed is doing everything they can to keep mortgage rates elevated. While the Fed does not directly influence mortgage rates, they have appeared to go above and beyond to make sure the markets know they remain hawkish. Job growth remains resilient and inflation is taming, but it’s still stubborn, and thus far the economy has been able to support the rate increases as first quarter GDP showed more growth.”

If the Fed’s objective is to slow the economy, mortgage rates in the 5s will be problematic. “If you go back to late July 2022, when mortgage rates dipped below 6% again, the result was a sharp increase in mortgage activity,” Bates notes. “With inventory so low, an increase in mortgage activity leads to bidding wars and increases in home prices.”

Bill Rogers, president and CEO of Homeowners Financial Group, says inventory on the resale side remains tight and has resulted in “unintentional landlords,” or current homeowners who are moving to a new home, but making the decision to keep their current homes (with below-market interest rates) to rent for a profit.

“Other homeowners are in an interest rate prison and staying put in their current homes much longer despite wanting to move,” he says. “They simply do not want to move into a new home with an interest rate that is twice what they currently have. This is negatively impacting housing inventory and the velocity of sales. As a result, across the country we see that most inventory growth is driven by new construction.”

With new construction making up nearly 35% of the total inventory nationally, home builders are in a strong position and have a competitive advantage when offering incentives.

“The best tool a builder can use is seller paid financing incentives in order to buy the purchaser’s rate down, keeping their rate below 6%,” says Jim Hunter, vice president and national builder manager for First Home Mortgage, adding that the cost required to accomplish this has varied over the past two months due to swings in the market in response to the Fed’s rate decisions and commentary on future rate decisions.

“Investors in mortgage-backed securities have little interest in the higher end of the rate scale due to the increased chance of early payoff or refinance,” he continues. “Today we are seeing each point buy the rate down at a greater velocity than traditional markets. Builders are taking advantage of the strong demand, maintaining or increasing their prices and using seller paid closing costs to buy the rate down for their purchasers.”