Mortgage Predictions: Homebuyers Aren't Thankful for Today's Mortgage Rates

It’s hard to be thankful for today’s housing market. Mortgage rates are high, prices are rising and inventory is still limited. 

For prospective homebuyers, the only silver lining was that 30-year mortgage rates were expected to drop to 6% by the end of December. In late summer, that forecast felt like a real possibility. 

Then came the surge. Average 30-year fixed mortgage rates spiked to around 7% in early November and have remained around there since. 

“At this point, 6% mortgage rates by the end of 2024 seem unlikely,” said Jacob Channel, senior economist at Lending Tree. “The uncertainty brought about by the results of the presidential election has offset most of the declines we saw through the end of the summer.”

What caused this about-face in the mortgage market? 

In October, robust economic data and ambiguity over President-elect Donald Trump’s future policies sent 10-year Treasury yields (a key benchmark for long-term mortgages) significantly higher. Bond market investors reconsidered their economic projections, and the Federal Reserve’s monetary policy outlook seems to have shifted. 

Financial markets had long expected the Fed to make another 0.25% interest rate cut at its upcoming meeting on Dec. 18, but now it’s a coin flip. On Nov. 14, Fed Chair Jerome Powell signaled that the central bank won’t rush to make rate cuts, throwing cold water on the hope for lower mortgage rates. 

Although we don’t yet know the full scope or economic impact of the next administration, housing affordability won’t change much in the short term. Treasury yields and mortgage rates are likely to stay higher for longer, and prospective homebuyers will continue to be sidelined by a combination of high interest rates, steep home prices and low inventory levels. 

Read more: Today’s Mortgage Rates for Nov. 27, 2024

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Did mortgage rates go up because of the election? 

Last month, stronger-than-expected labor and inflation reports prompted investors to reconsider the pace of future Fed cuts, and markets also started defensively “pricing in” a Trump victory. Trump’s proposals for tax cuts and tariffs could stimulate demand, increase deficits and cause inflation to reheat, which could prompt the Fed to delay future rate reductions. 

In other words, bond traders drove up rates prior to the election because they assumed higher inflationary pressures resulting from the presidential and congressional outcome, according to Colin Robertson, founder of the housing market site The Truth About Mortgage. 

Overall, 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. Fed Chair Powell has said it’s too early to say how Trump’s policies and a Republican-led Congress might alter the central bank’s approach to achieving maximum employment and price stability. 

“Trump’s actual policies as president might be a lot less dramatic than those he’s proposed in the past,” said Channel. 

How do Fed interest rate cuts impact mortgage rates?

The Fed doesn’t have direct control over the mortgage market, but its monetary policy influences mortgage lenders and the general direction of borrowing rates. Inflation and labor data act as a barometer for the health of the economy and influence the Fed’s decision to adjust its benchmark short-term interest rate up or down. 

Starting in early 2022, the central bank was focused on taming inflation by implementing a series of aggressive rate hikes. Now that inflation has gone down (it’s been slowly cooling in the direction of the Fed’s annual target range of 2%) and the labor market has weakened, the Fed pivoted to cutting interest rates to circumvent a job-loss recession. With each interest rate cut, it’s less expensive for banks to borrow money, allowing them to lower the rates offered on consumer loans, including mortgages. 

In the lead-up to the Fed’s first rate cut in September, mortgage rates went down as fears mounted over unemployment and a potential economic downturn. Perhaps ironically, that offered a glimmer of hope to those hoping to purchase a home this year. Many expected home loan rates to plummet if the Fed rushed ahead with more rate reductions. 

As we’ve seen play out, mortgages also respond to an interplay of economic factors, including investor expectations, geopolitical events and shifts in the bond market.

Any incoming economic data that beat markets’ expectations, such as hotter inflation or lower unemployment, reduces the likelihood of cuts and will maintain upward pressure on mortgage rates, said Nicole Rueth, SVP of the Rueth Team Powered by Movement Mortgage.

Could mortgage rates still drop by the end of the year?

Home loan rates are often quick to rise but painstakingly slow to fall. For instance, it can take a few soft economic reports for mortgage rates to move lower, but just one strong piece of data to send them higher. Although experts optimistically called for rates to fall close to 6% by the end of 2024, no one has a crystal ball.

“For mortgage rates to average closer to 6%, we would need to see a meaningful weakening of the labor market, which would push the Federal Reserve to cut rates by more than what the market expects,” said Matthew Walsh, housing economist at Moody’s Analytics. 

If the next labor report, released on Dec. 6, shows a marked increase in unemployment, for example, bond yields and mortgage rates would likely move lower quickly. 

If the Fed implements additional rate cuts over the next year, mortgage rates should gradually decline. The timing of those cuts, as well as the economic data we get between each policy meeting, will determine how quickly (and how far) mortgage rates can fall. 

An even bigger wild card is what actually comes from Trump’s proposed economic agenda. 

“As markets process new information, the path of mortgage rates will be volatile,” said Kara Ng, senior economist at Zillow. “Mortgage rates will fall, then rise, then fall again.” 

Here’s a closer look at where some major housing authorities predict mortgage rates will go this year and next:

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. It’s also worth noting that a dip in mortgage rates will likely increase homebuying interest overall, which may drive home prices up and keep the market unaffordable for a while.

“As mortgage rates come down, the housing market could get more competitive for home shoppers,” said Danielle Hale, chief economist at Realtor.com.  

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.

More on today’s housing market