Mortgage rates are unlikely to fall until the Federal Reserve Board stops raising its short-term interest rates. With inflation falling in recent months, the Fed is likely to end its rate hikes. But with Wednesday's inflation report showing that inflation jumped more than expected to 3.7 per cent year-on-year in August, it's still an open question whether the Fed will end its rate hikes.

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

Mortgage rates are now the highest they've been since 2002. Last week, the average rate for a 30-year fixed-rate loan was 7.12%, which effectively froze the housing market. Buyers can't afford to buy homes, and sellers don't want to raise or lower the price of their new homes and give up their ultra-low mortgage rates.

Because we don't know how the Fed will react, we can't even guess what will happen to interest rates," said David Stevens, CEO of Mountain Lake Consulting. Mortgage rates could bounce around 7 ticks, they could bounce around 8 ticks, they could bounce around 6 ticks. They could rise for a quarter, they could fall for a quarter, or they could stay flat."

The Fed will meet next week to decide whether to raise rates again. Even if the Fed chooses to pause this month, it could raise rates at its next meeting this autumn.

The impact of the Fed's actions, i.e., higher mortgage rates, has significantly reduced the housing market, which is one of the Fed's goals. During the COVID-19 pandemic, home prices soared to record levels and continued to rise rapidly. Now, thanks to higher mortgage rates, home prices have stabilised, albeit still at very high levels. But the cost is also high.

The shortage of homes for sale has reached crisis levels as homeowners hold off on selling their homes. Bidding wars and offers over asking price are returning to the market as there are still intrepid homebuyers vying for the very limited supply of homes for sale. And higher mortgage rates combined with high home prices are putting the dream of homeownership out of reach for many first-time buyers.

The higher the mortgage rates, the more potential homebuyers can't count. According to an analysis by Realtor.com®, mortgage payments are about 14% more expensive now than they were a year ago and a staggering 88% higher than they were two years ago. (Calculations are based on median list prices in August 2021, 2022 and 2023, and the latest weekly mortgage rates for 30-year fixed-rate loans offered by Freddie Mac.)

First American economist Ksenia Potapov believes the latest inflation data will prompt the Fed to raise rates again.

As a result, mortgage rates are likely to remain in the 6.5 per cent to 7.5 per cent range through the end of the year, meaning that affordability will remain a challenge for many homebuyers, she says.

Stevens is less certain.

"Mortgage rates have been volatile and dramatic. They continue to soar beyond what any of us expected," he said. Until the Fed finishes raising rates and makes it clear, we will continue to face volatile mortgage rates.