After the Federal Reserve carried out its third interest rate cut last week, mortgage rates rose higher. The average 30-year fixed rate jumped back up to its November high of around 7%.
That seesaw — when interest rates go down but mortgage rates go up — underlines how the Fed doesn’t directly set home loan rates. Even though a reduction in the central bank’s benchmark interest rate will lower overall borrowing and financing costs for consumers and businesses, the mortgage market is its own volatile creature.
Mortgage rates are driven by investor expectations and shifts in bond yields. Overall, investors care more about the Fed’s future outlook for rate cuts than one individual cut.
Given strong economic data, the Fed is projecting a slower pace of rate cuts next year, which will keep mortgage rates elevated in the near term. Unless the economy weakens, experts say mortgage rates are unlikely to fall significantly over the course of 2025. Here’s why.
Read more: 2025 Mortgage Rate Forecast
Why did mortgage rates go up after the Fed cut interest rates?
The post-Fed meeting surge in Treasury yields and home loan rates was due in large part to the Fed’s newly updated Summary of Economic Projections. This document outlines expectations for just two 0.25% interest rate cuts in 2025, down from four previously.
Markets were heavily weighing remarks by Fed Chair Jerome Powell, who cited concerns over inflation reigniting and uncertainty surrounding President-elect Donald Trump’s tax and tariff proposals. Powell conveyed a more conservative tone about the potential for future policy changes: “When the path is uncertain you go a little bit slower,” said Powell.
According to Matt Graham of Mortgage News Daily, prices in the bond and stock market quickly plunged taking cues from “a more hawkish Fed.” Hawkish monetary policy tends to be more restrictive, relying on higher interest rates to keep inflation in check.
To fulfill its main objectives of maintaining maximum employment and containing inflation, the Fed constantly assesses economic data to determine whether to adjust its benchmark short-term interest rate up or down.
Though the Fed pivoted to cutting interest rates back in September in response to cooler inflation and a weakening labor market, it’s also wary of easing interest rates too quickly only to see progress on inflation stall out or reverse course entirely.
Experts say the Fed is likely to hold off on additional reductions until March or even later. But if incoming data shows unemployment rising above current levels, the Fed could easily change its tune, said Logan Mohtashami, lead analyst at HousingWire. Ongoing interest rate reductions combined with weaker economic data would allow mortgage rates to come down over time.
Where are mortgage rates headed in 2025?
Although experts optimistically predicted rates would fall close to 6% by the end of 2024, projections have changed significantly. Fannie Mae now expects average 30-year fixed mortgage rates to hold above 6.5% until early 2025.
“If the Fed does end up only cutting twice next year, it’s possible mortgage rates will stay pretty similar to where they are now,” said Chen Zhao, head of economic research at Redfin.
When considering the variables of the economic cycle, HousingWire’s Mohtashami’s says his forecast range for 30-year fixed mortgage rates is 5.75% to 7.25%.
But given a new administration, changes in the geopolitical outlook and a risk of inflation rebounding, forecasts could change again over the coming months. Future rate movement depends on an array of factors, including:
Trump’s economic policies: Trump’s proposals for tax cuts and tariffs are a big wild card for mortgage rates. Experts say such moves could stimulate demand, increase deficits and push inflation back up. That could prompt the Fed to delay future rate reductions, which in turn would keep home loan rates high.
10-year Treasury yields: Average 30-year fixed mortgage rates closely track bond yields, specifically 10-year Treasury yields. If inflation and labor data continues to be strong, bond yields and mortgage rates will go up. The opposite will happen if unemployment rises or inflation cools and the Fed continues cutting rates.
Geopolitical situations: Mortgage rates are also impacted by geopolitical events, including military conflicts and elections. Political instability can lead to economic uncertainty, which can result in more volatility with bond yields and mortgage rates.
Potential curveballs: Bond investors often act in anticipation of what they believe will happen in the economy. For example, if the expectation is for unemployment to increase, bond yields and mortgage rates will fall. But if the outcome doesn’t match market expectations, yields can quickly swing higher or lower.
Other unknowns: Though Trump’s policies have led to expectations of higher inflation, there’s still a lot of uncertainty surrounding the timing and substance of economic changes and the Fed’s cadence of interest rate adjustments over the next year. Campaign promises rarely mirror the policies that end up being implemented, and it’s nearly impossible for investors to predict how big the gap between the two will be.
Aside from the normal day-to-day volatility, we’re probably looking at mortgage rates above 6% for a while. That may seem high compared with the recent 2% rates of the pandemic era. But experts say getting below 3% on a 30-year fixed mortgage is unlikely without a severe economic downturn. Since the 1970s, the average rate for a 30-year fixed mortgage has been around 7%.
Prospective homebuyers who’ve been waiting for mortgage rates to drop for the past few years may need to adjust to the “new normal” in the mortgage market.
What else is happening in the housing market?
Today’s unaffordable housing market results from high mortgage rates, a long-standing housing shortage, expensive home prices and a loss of purchasing power due to inflation.
🏠 Low housing inventory: A balanced housing market typically has five to six months of supply. Most markets today average around half that amount. Although we saw a surge in new construction in 2022, according to Zillow, we still have a shortage of around 4.5 million homes.
🏠 Elevated mortgage rates: At the start of 2022, mortgage rates were near historic lows of around 3%. As inflation surged and the Fed began hiking interest rates to tame it, mortgage rates roughly doubled within a year. In 2024, mortgage rates are still high, effectively pricing millions of prospective buyers out of the housing market. That’s caused home sales to slow, even during typically busy home-buying months, like the spring and early summer.
🏠 Rate-lock effect: Since the majority of homeowners are locked into mortgage rates below 6%, with some as low as 2% and 3%, they’re reluctant to sell their current homes since it would mean buying a new home with a significantly higher mortgage rate. Until mortgage rates fall below 6%, homeowners have little incentive to list their homes for sale, leaving a dearth of resale inventory.
🏠 High home prices: Although home buying demand has been limited in recent years, home prices remain high because of a lack of inventory. The median US home price was $434,568 in September, up 5.1% on an annual basis, according to Redfin.
🏠 Steep inflation: Inflation increases the cost of basic goods and services, reducing our purchasing power. It also impacts mortgage rates: When inflation is high, lenders typically set interest rates on consumer loans to compensate for the loss of purchasing power and ensure a profit.
Expert advice for homebuyers
It’s never a good idea to rush into buying a home without knowing what you can afford, so establish a clear homebuying budget. Here’s what experts recommend before purchasing a home:
💰 Build your credit score. Your credit score is one of the main factors lenders consider when determining whether you qualify for a mortgage and at what interest rate. Working toward a credit score of 740 or higher will help you qualify for a lower rate.
💰 Save for a bigger down payment. A larger down payment will allow you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, making a down payment of at least 20% will also eliminate the need for private mortgage insurance.
💰 Shop around for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend you get at least two to three loan estimates from different lenders before making a decision.
💰 Consider the rent vs. buy equation. Choosing to rent or buy a home isn’t just comparing monthly rent to a mortgage payment. Renting offers flexibility and lower upfront costs, but buying allows you to build wealth and have more control over your housing costs. The best choice depends on your finances, lifestyle and how long you plan to stay in one place.
💰 Consider mortgage points. One way to get a lower mortgage rate is to buy it down using mortgage points. One mortgage point equals a 0.25% decrease in your mortgage rate. Generally, each point will cost 1% of the total loan amount.
