America's prospective homebuyers absorb harsh reality: Mortgage rates probably aren't coming down for a while

Many Americans have been holding back from jumping into the housing market in the hopes that mortgage rates will decline. So far, they haven’t.

The average 30-year mortgage rate has been above 6% for two years — and is likely to stay above that level for the foreseeable future, experts say, NBC reports.

A combination of better-than-expected growth and uncertainty about the impact of President-elect Donald Trump’s economic proposals, especially on inflation and the deficit, are combining to keep rates elevated. That’s despite the Federal Reserve’s push to lower its key federal funds rate to make borrowing in the economy easier.

“Sixes are the new normal,” said Lisa Sturtevant, chief economist at Bright MLS, a mortgage listing services group, referring to 6% mortgage rates.

Interest rates in general have been on the decline. On Thursday, the Federal Reserve announced it was lowering its key federal funds interest rate by a quarter point against a backdrop of relatively cooler inflation and a moderating jobs market. In September, the Fed cut the rate by half a percentage point.

Cutting that rate often starts a waterfall effect that lowers other lending rates across the economy.

“[Thursday’s] rate cut benefits anyone that borrows based on short-term lending,” said Brian Rehling, head of global fixed income strategy at the Wells Fargo Investment Institute. “This includes corporations and consumers tackling credit card debt, and sometimes car buyers. It’s really not going to be impacting mortgage rates at all.”

Mortgage rates work differently. Their movements are more closely tied to demand for government bonds. When demand for those increases, mortgage rates tend to fall.

But thanks to strong economic growth in the pandemic era, demand for those bonds has weakened.

Meanwhile, concerns about the growing budget deficit and the potential need for the U.S. government to issue even more debt have further weakened investor appetite to purchase government bonds, experts say.

Trump’s victory in Tuesday’s presidential election only exacerbated those concerns.

Analysts have warned Trump’s plan to impose blanket tariffs on some $3 trillion in goods could reignite inflation. The Trump campaign has pushed back on the idea that the tariffs would prove inflationary, citing his past success in increasing tariffs in his first administration.

However, the scope of those tariffs was much smaller than what Trump has recently proposed.

Other economists believe tariffs could have a more benign effect. But Trump’s other proposals, like extending or widening tax cuts, could wind up sending interest rates higher on their own if they cause demand to heat up again.

If the economy is strong enough to weather the impact from Trump’s tariffs, that could push mortgage rates higher, according to Mike Fratantoni, chief economist at the Mortgage Bankers Association — especially if more money floods into the system from the government.

“Investors expect somewhat stronger economic growth, higher inflation, and larger deficits,” Fratantoni said in a note to clients Thursday. As a result, rates “will remain within a fairly narrow range over the next year, with mortgage rates moving higher on signs of economic strength and more stimulative fiscal or monetary policy, or lower if it’s the opposite,” Fratantoni said in a note to clients Thursday.

Mortgage rates have come down from the peak of nearly 8% seen last fall, when both inflation and economic growth were at pandemic-era highs.

Yet the still-elevated rates have put a stranglehold on large swaths of the housing market, especially sales of existing homes, which fell to a 14-year low in September, according to the National Association of Realtors.

“September’s low level of existing home sales primarily is due to very high mortgage rates, not Hurricane Helene or the approaching elections,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a recent note.

“Looking ahead, we expect housing market activity to remain subdued well into 2025,” he continued.

The interest-rate environment has created a “lock-in” effect whereby current mortgage holders are unwilling to give up the lower rates at which they had purchased their existing homes, which currently average about 4%, Tombs said.

“As a result, interest payments for most existing homeowners will jump if they move home, creating a huge incentive to stay put,” he said.

A glimmer of hope for potential buyers can be found in the trend of slowly increasing housing supply, which has also helped cool the rapid home-price growth seen in the early part of the pandemic era. NBC News’ Home Buyer Index, which captures the difficulty of buying a home in various U.S. markets, has now eased for three straight months.

Yet there remain wide variances among regions in terms of where inventory is coming online, and the overall trend has slowed again recently.

It all adds up to conditions that will remain difficult for homebuyers looking to purchase at a reasonable price in a quality market, and especially for those who’d expect to see a significant return on their housing investment, even in the medium term, Sturtevant said.

Yet the market will resolve over time thanks to one major factor, she said: demographics. The baby boomers who have dominated the market in recent decades will not be around forever, she explained. While that means much more incremental growth for home prices, it will be much better for creating a more balanced market.

“It’s going to be a demographic ledge, a slow slope,” she said. “It’s going to take some time, but it will be good for stability, if not great for home price appreciation.”

Warren Serink contributed.

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