A new reality of 7% mortgage rates could be setting in, top economist says

Mortgage rates surpassed 7% for the first time all year last week, according to Freddie Mac; daily readings are trending higher, with the average 30-year fixed mortgage rate at 7.39%.

It’s a far cry from the historically low mortgage rates seen throughout the pandemic and years before. At one point, the average mortgage rate was as low as 2.65%. That might not happen ever again, but it definitely won’t happen anytime soon, according to Carl Riccadonna, chief U.S. economist at BNP Paribas.

“If we look at where a 10-year Treasury yield is trading or settling, that’s a key driver of where mortgage rates are going,” Riccadonna said, appearing on CNBC.

He continued: “I think a new reality is setting in with homebuyers that we’re not going to go back to those pandemic lows anytime soon, given the very soft landing in the economy, persistent inflation pressures, which are trending lower but taking some time to move there—and that means elevated mortgage rates with a seven as the first number as opposed to two during the pandemic.”

Mortgage rates were falling as inflation cooled, but after multiple hotter-than-expected consumer price index reports, and hesitation on interest rate cuts from the Federal Reserve (after it once signaled three this year), mortgage rates are creeping up. Last week, Fed Chair Jerome Powell said: “Given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.” If inflation persists, Powell signaled he’d keep interest rates where they are for as long as needed.

Riccadonna said disinflation has a three-act structure. “Act two is the shelter inflation story, and we’re still in the middle of that,” he noted, adding that his team expects further disinflation in housing to come.

Still, it’s not clear whether mortgage rates will reach 8% again, a more than two-decade high, but what we do know is how unaffordable it’s become to buy a home. For one, the cost of owning a home is the highest on record, and the salary needed to buy a starter home has almost doubled since the start of the pandemic. Although it’s not all about mortgage rates; home prices rose substantially during the pandemic, so they were already high. But people stopped selling their homes when mortgage rates rose. A lack of sellers coupled with an existing housing shortage have made it so prices can’t fall.

“Affordability, of course, gets squeezed considerably by that,” Riccadonna said, referring to higher mortgage rates. “By some metrics, housing is the least affordable since the early 1980s.” It’s not the first time someone’s referenced the ’80s when discussing the current housing market. The earlier part of that decade was eerily similar to the past couple of years: high inflation and high mortgage rates, as Fortune previously reported.

Only time will tell how high mortgage rates get this time around, and how long they stay high.

This story was originally featured on Fortune.com