Since late 2022, mortgage rates have surged, reaching levels between 6% and 7%, and in the fall of 2023, they came dangerously close to eclipsing 8%. This spike marked the highest 30-year mortgage rate observed in over two decades, creating significant challenges for both homebuyers and homeowners alike.
The combination of these elevated rates and rising home prices has led to a sharp increase in mortgage payments. According to data from the Mortgage Bankers Association, the median monthly mortgage payment on new home purchases has risen to $2,167, reflecting a 0.2% increase from the previous year. This spike has sidelined many potential homebuyers and deterred existing homeowners from selling their properties, as they are reluctant to give up their lower interest rates secured in previous years.
This scenario raises a pressing question: How long can these higher mortgage rates persist? And when, if at all, can consumers expect rates to decrease to a level where monthly payments become more manageable? To explore these questions, it’s essential to understand the underlying factors driving these rates upward and consider expert opinions on the future trajectory of mortgage rates.
Understanding the Surge in Mortgage Rates
The primary driver behind the increase in mortgage rates has been inflation. As inflation rates began to climb, the Federal Reserve took action to curb spending by raising its benchmark federal funds rate—the rate at which banks borrow money from each other. Over the course of 2022 and 2023, the Federal Reserve increased this rate 11 times, pushing it from near 0% to the current range of 5.25% to 5.50%. Although mortgage rates are not directly tied to the Fed’s rate, they tend to rise in response to these increases.
Source: FREDDIE MAC, FANNIE MAE, MORTGAGE BANKERS ASSOCIATION
While the Fed’s actions have been somewhat successful in reducing inflation, the impact has not been sufficient to meet the central bank’s target. As of June 2024, the inflation rate stood at 3.3% year-over-year, still above the Fed’s 2% goal. Consequently, the Fed has maintained its higher interest rates in an effort to bring inflation further under control. These persistently high rates are also keeping mortgage rates elevated.
Until the Federal Reserve deems inflation sufficiently under control and begins to lower its benchmark rate, mortgage rates are expected to remain high. As Evan Luchaco, a home loan specialist at Churchill Mortgage in Portland, Oregon, explained, “In order to see rates improve, we need to see inflation numbers decreasing, new job creations slow down, and potentially unemployment filings to increase. These are all economic signs of a slowdown that will spur the Fed to take action in lowering the Fed funds rate, which will have a trickle-down effect to lower mortgage rates.”
Luchaco anticipated that this process might start toward the end of the year, although this is far from certain. The CME FedWatch Tool, which predicts future Fed moves based on investing activity, suggests that a rate cut could happen as early as the Fed’s September meeting. However, it’s likely that only one rate cut will occur this year.
Predictions for Mortgage Rates
Forecasting the exact trajectory of mortgage rates is challenging, and predictions can vary widely depending on the expert consulted. While many experts agree that rates may gradually decrease over the next year or two, they do not anticipate a return to the ultra-low rates of 3% or 4% seen during the COVID-19 pandemic. Instead, any reductions in mortgage rates are expected to be modest.
Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate, noted that a significant drop in mortgage rates would require a notable easing of inflation. She stated, “Based on current economic predictors, that looks like potentially fall; however, all the predictions have been wrong for the last two years.”
Should You Wait for Lower Mortgage Rates?
With the expectation that mortgage rates will decline only gradually, potential homebuyers are left to decide whether to wait for lower rates or proceed with purchasing a home now. The answer depends on individual circumstances, but it’s important to run the numbers and consider the broader housing market conditions.
As Beeston pointed out, “For people waiting for rates to come down, I often show the payment now versus a percent lower. They are often shocked by how little the difference is. The impact of a rate drop on your payment is far more dramatic at a $1 million purchase than a $100,000 one.”
In addition to the potential savings on monthly payments, buyers should also consider the dynamics of the housing market. Lower mortgage rates could lead to increased competition for properties, driving up home prices and potentially sparking bidding wars. Luchaco warned that “home prices aren’t likely to come down in any significant way, and while rates may decline, this will likely only lead to more people getting into the market and creating greater demand for housing—pushing home prices up all over again.”
Given these factors, many experts recommend buying a home when the timing and financial situation are right for the individual, rather than waiting for a potential rate drop. Purchasing a home now allows buyers to start building equity sooner and take advantage of any future rate declines through refinancing.
As Erik Christiansen, an industry expert, emphasized, “From where I sit, the cost of waiting will continue to hurt the buyer, even in today’s rate environment. Home prices continue to increase at 5% to 6% year over year, and with the loss in appreciation and loan pay-down, the longer the buyer waits, the more they lose the opportunity to improve their net worth.”
In conclusion, while mortgage rates may eventually decrease, the timing and extent of any reductions remain uncertain. For those in a position to buy now, the benefits of entering the market may outweigh the potential gains from waiting for lower rates.
