Mortgage Predictions: The Fed Isn't Hurrying to See Lower Rates

Federal Reserve Chair Jerome Powell just threw cold water on the hope that mortgage rates could drop to 6% by the end of the year. Why? Economic growth is, by official numbers, too strong. 

In a talk with business leaders on Thursday, Powell indicated that the pace of interest rate cuts is likely to be slower than anticipated over the near term. “The economy is not sending any signals that we need to be in a hurry to lower rates,” said Powell. 

So far this year, the central bank has made two interest rate cuts: the first 0.5% reduction in September was followed by a smaller 0.25% reduction on Nov. 8. 

Before Powell’s remarks this week, financial markets were betting on another 0.25% rate cut on Dec. 18. Now, it’s a coin flip. While the Fed wants to avoid keeping borrowing rates too high — which could tip the economy into a recession — it’s also wary of cutting interest rates too quickly only to see inflation reheat. 

The bigger wild card is how the next administration’s economic policies could shake things up. President-elect Donald Trump’s proposals for tax cuts and tariffs could stimulate demand, increase deficits and push inflation back up (it’s been slowly cooling in the direction of the Fed’s annual target range of 2%). 

That’s not good news for the housing market or for would-be homebuyers, who have been sidelined by a combination of soaring mortgage rates, rising home prices and limited supply. 

With longer-term Treasury yields holding high and a December cut on shaky ground, mortgage rates are prone to staying painfully elevated. For average home loan rates to drop to the 6% level before the start of 2025 is becoming more of a remote chance than a realistic forecast. 

“It’s not impossible for rates to do a sharp downturn between now and the end of the year, but it does seem highly unlikely,” said Keith Gumbinger, vice president of mortgage site HSH.com. 

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Why are mortgage rates higher despite Fed rate cuts? 

Average 30-year fixed mortgage rates surged roughly 0.7% since early October. According to the data we pull from Bankrate, today’s average rate for a 30-year fixed mortgage is 6.91%. 

Prior 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 reductions to its benchmark interest rate to avoid a recession. 

But then, stronger-than-expected labor and inflation reports prompted investors to reconsider the outlook for future Fed cuts, and markets started defensively “pricing in” a Trump victory. 

According to Colin Robertson, founder of the housing market site The Truth About Mortgage, the bond market already assumed higher inflationary pressures resulting from the presidential and congressional outcome. Because bond traders drove up rates before the election, Robertson expects some temporary rate relief, though there won’t be any dramatic drops. 

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. 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. 

“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.” 

How do Fed cuts impact mortgage rates?

Inflation and labor data are 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 laser-focused on taming inflation by implementing a series of aggressive rate hikes. Now that inflation has cooled and the labor market has weakened, the Fed pivoted to cutting interest rates to circumvent a job-loss recession. 

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. With each interest rate cut the Fed makes, it becomes less expensive for banks to borrow money, allowing them to lower the rates offered on consumer loans, including mortgages.

However, mortgages also respond to an interplay of economic factors, including investor expectations, geopolitical events and shifts in the bond market.

If the Fed implements additional rate cuts over the next year, mortgage rates should gradually decline. But 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. 

Any incoming economic data that beats 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.

Will mortgage rates hit 6% by the end of the year? 

Mortgage rates are notoriously difficult to predict. Future rate movement hinges on economic data and decisions by lenders we don’t yet have. Though experts optimistically called for rates to fall close to 6% by the end of 2024, no one has a crystal ball.

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.  

“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. 

Though some experts see mortgage rates decreasing by the end of the year, they moved significantly up in October and reversed any improvements we saw in September. 

“Even if there is a meaningful downturn in inflation to end the year, I don’t think we’ll see rates make it back to near 6%, but there is a chance they could drift back to the mid-6% range over the next six weeks,” Gumbinger said. 

Looking further out, experts say rates could fall into the mid-5% range later in 2025, though that could all change in a month. 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 U.S. home price was $427,989 in September, up 3.9% 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.

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