The holiday season isn’t prime time for the housing market. Fewer people buy and sell homes in the winter months, leading to a decline in home loan applications.
Furthermore, mortgage rates have reached their highest levels in weeks. Following the Federal Reserve’s third interest rate cut at its December policy meeting, the average 30-year fixed rate jumped back up to its November high of around 7%.
Though the Fed influences the direction of overall borrowing rates, it doesn’t directly control the mortgage market. Mortgage rates are driven by investor expectations and move with the yield on the 10-year Treasury, with numerous factors affecting the bond market. For mortgage rates to reverse their upward trend, bond market investors would have to be convinced that the economy is cooling.
Until there’s proof that inflation is easing and the job market is softening, mortgage rates will stay elevated in the near term. The Fed is projecting a slower pace of rate cuts over the course of 2025, which will likely keep average rates somewhat volatile, fluctuating between 5.75% on the low end and 7.25% on the high end, according to HousingWire’s 2025 forecast.
Read more: 2025 Mortgage Rate Forecast
Why are mortgage rates higher after the Fed’s rate cut?
The recent surge in longer-term Treasury yields and home loan rates was due in large part to the Fed’s newly updated Summary of Economic Projections, outlining expectations for just two 0.25% interest rate cuts in 2025, down from four previously.
To maintain maximum employment and contain inflation, the Fed assesses economic data to determine whether to raise or lower its benchmark short-term interest rate. Investors care about the Fed’s future outlook for rate adjustments because it determines their trading strategy and risk assessment.
This month, markets heavily weighed Fed Chair Jerome Powell’s concerns about inflation reigniting and President-elect Donald Trump’s tax and tariff proposals. Powell conveyed a more conservative tone about future policy changes: “When the path is uncertain, you go a little bit slower.”
Taking cues from “a more hawkish Fed,” prices in the bond and stock market quickly plunged, according to Matt Graham of Mortgage News Daily. Hawkish monetary policy tends to be more restrictive, relying on higher interest rates to keep inflation in check.
Though the Fed pivoted to cutting interest rates back in September, it’s wary of easing them too quickly only to see progress on inflation stall or reverse course entirely. Experts say the Fed is likely to hold off on additional reductions until March or even later.
Where are mortgage rates going 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.
Aside from the normal day-to-day volatility, mortgage rates will stay 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%.
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 and budget deficits, there’s still a lot of uncertainty surrounding the timing and substance of economic changes. Campaign promises rarely mirror the policies that end up being implemented, and it’s impossible for investors to predict how big the gap between the two will be.
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.
Should you wait or buy now?
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.
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