Mortgage rates have soared over the past week, raising concerns that rates could go even higher.

The average rate for the past week was 7.09%, which is the highest rate since April 2002, according to Freddie Mac. Unfortunately for homebuyers, there's no way to know if rates have peaked or are just beginning to climb.

"Rates may be going up," said Len Kiefer, Freddie Mac's deputy chief economist." I do think rates could peak and then fall back to 6% [range]. But there is a lot of uncertainty.

If the Federal Reserve Board continues to raise short-term interest rates to keep inflation down, rates could go even higher, perhaps as high as 8 per cent. Mortgage rates typically follow the same trajectory as the Fed's rates.

Therefore, if inflation is higher than the Fed would like to see, the Fed may raise rates, causing mortgage rates to rise.

However, if inflation data shows that the Fed's rate hikes are working, the Fed may pause. That could cause mortgage rates to fall.

"Rates could be 8 per cent this year, or they could be 6 per cent or 5.75 per cent. It could be both," said David Stevens, CEO of Mountain Lake Consulting, which advises the mortgage industry. It depends on economic data and the Fed's decision.

Higher rates hurt first-time buyers the most. They don't have homes that have appreciated in value over the past few years that they can sell and use the proceeds to finance their next purchase.

This is a different experience than that of Baby Boomers or even older members of Generation X, who have traditionally owned their homes for some time. Jessica Lautz, deputy chief economist for the National Association of Realtors®, says about half of all Baby Boomers who buy a home pay cash in full. The rest of the repeat buyers were able to pay mostly cash on their next home purchase.

First-time buyers don't have the home equity to make a large down payment or an all-cash purchase," said Lautz. We already know that first-time homebuyers have been hit by a housing affordability and inventory crisis that will only make matters worse."

Shmuel Shayowitz, president and chief lending officer of Approved Funding in Riverside, N.J., saw rates between 7.25 percent and 7.5 percent Thursday morning. (Rates vary depending on the borrower's creditworthiness, debt, down payment amount and other factors.)

Rising interest rates have caused a slowdown in home buying. Part of the reason is that there are too few homes on the market - many existing homeowners don't want to list their homes for sale and then have to apply for new mortgages at higher rates to buy other homes. During the COVID-19 pandemic, most people locked in very low interest rates.

Many homebuyers are also nervous about purchasing a home at today's rates.

"They're afraid to buy a home at such a high rate," Shayowitz says." They think the rate hike is much more costly than it actually is."

Freddie Mac's Kiefer points out that while mortgage rates make many homebuyers uncomfortable, they have not been historically high.

At one point in the autumn of 1981, rates peaked at more than 18 per cent. For much of the 1990s and early 2000s, rates hovered between 6 and 8 percent.

It's certainly not unprecedented," he says of today's rates. We haven't experienced this kind of interest rate environment in a generation."

But there's one key difference this time around: the last time rates were at this level, home prices were much lower.

In 2002, the national median home price was about $150,000, says Lisa Sturtevant, chief economist at Bright MLS. Since then, national home prices have nearly tripled. According to the latest data from Realtor.com®, the median listing price was $440,000 in July.

High mortgage rates will keep more buyers out of the market, but will also continue to hold sellers back, impacting both sides of the market, Sturtevant said in a statement.

With inflation easing, the Fed may choose to keep rates steady at its upcoming meeting in September. That could put downward pressure on mortgage rates.

"We should have peaked and rates should be coming down because inflation has slowed. We need the Fed to get on board," said NAR's Lautz. She expects rates to fall to a low of 6 percent by the end of the year.

Mortgage rates could fall if the Fed pauses and doesn't issue a series of hawkish statements, said Stevens of Mountain Lake Consulting.