Mortgage Rate Forecast: Holiday week brings higher rates

The holiday season is not a peak time for the housing market. Fewer people buy and sell homes in the winter months, resulting in fewer home loan applications.

Furthermore, mortgage rates have reached their highest levels in weeks. After the Federal Reserve decision Lowering interest rates for the third time At the December policy meeting, the average Fixed rate for 30 years It jumped back to its November high of about 7%.

Although the Fed influences the direction of overall borrowing rates, it… It does not directly control the mortgage market. Mortgage rates depend on investors’ expectations and move with the yield on 10-year Treasury bonds, with many factors affecting the bond market. For mortgage rates to reverse their upward trend, bond market investors must be convinced that the economy is slowing.

Until there is evidence that inflation is subsiding and that the labor market is declining, Mortgage rates It will remain high in the near term. The Fed expects a slower pace of interest rate cuts Over the course of 2025which is likely to keep average interest rates somewhat volatile, fluctuating between 5.75% on the low end and 7.25% on the high end, according to HousingWire 2025 Forecast.

Read more: Mortgage rate forecasts for 2025

Why did mortgage rates rise after the Fed rate cut?

The recent rise in long-term Treasury yields and mortgage interest rates was due in large part to a new update by the Federal Reserve. Summary of economic forecastsexplaining expectations of only two interest rate cuts of 0.25% in 2025, down from four previous cuts.

To maintain Maximum employment To contain inflation, the Fed evaluates economic data to determine whether to raise or lower its benchmark short-term interest rate. Investors care about the Fed’s future outlook on interest rate adjustments because it determines their trading strategy and risk assessment.

This month, markets have focused heavily on Federal Reserve Chairman Jerome Powell’s concerns about the return of inflation and the decisions of President-elect Donald Trump. Tax and tariff proposals. Powell conveyed a more conservative tone about future policy changes: “When the path is uncertain, you go a little slower.”

Taking cues from a more hawkish Fed, prices in the bond and stock market fell rapidly, according to Hans Matt Graham Daily Mortgage News. Tight monetary policy tends to be more restrictive and relies on higher interest rates to control inflation.

Although the Fed turned to cutting interest rates again in September, it is wary of easing them too quickly only to see progress in inflation stall or reverse course altogether. Experts say the Fed will likely postpone additional cuts until March or even later.

Where will mortgage rates go in 2025?

Although experts optimistically predicted that rates would fall to nearly 6% by the end of 2024, expectations have changed dramatically. Fannie Mae Now you expect average 30-year fixed mortgage rates To remain above 6.5% until early 2025.

“If the Fed ends up cutting interest rates just twice next year, mortgage interest rates will likely remain very similar to where they are now,” he said. Chen Zhaohead of economic research at Redfin.

Aside from the normal daily fluctuations, mortgage rates will remain above 6% for a while. This may seem high compared to what has happened recently rates 2% From the era of the epidemic. But experts say getting less than 3% on a 30-year fixed mortgage is unlikely without a severe economic downturn. Since the 1970s, the average price of a 30-year fixed mortgage It was about 7%.

Given a new administration, changes in geopolitical outlook and the risk of an inflation rebound, expectations may change again over the coming months. Future price movement depends on a range of factors, including:

Trump’s economic policies: Trump Proposals for tax cuts and tariffs It is a big wild card for mortgage rates. Experts say such moves could stimulate demand, increase the deficit and push inflation higher again. This could prompt the Fed to delay future interest rate cuts, which in turn would keep home loan interest rates high.

10-year Treasury yields: Average 30-year fixed mortgage interest rates closely track bond yields, specifically 10-year Treasury yields. If inflation and employment data continue to be strong, bond yields and mortgage rates will rise. The opposite will happen if unemployment rates rise or inflation declines and the Fed continues to cut interest rates.

Geopolitical situation: Mortgage rates are also affected by geopolitical events, including military conflicts and elections. Political instability can lead to economic uncertainty, which can lead to greater volatility with bond yields and mortgage rates.

Possible curves: Bond investors often act in anticipation of what they think will happen in the economy. For example, if unemployment is expected to increase, bond yields and mortgage rates will decline. But if the result does not match market expectations, returns may fluctuate more or less quickly.

Other unknowns: Although Trump’s policies have led to expectations of higher inflation and budget deficits, there is still much uncertainty surrounding the timing and content of economic changes. Election campaign promises rarely reflect the policies that will ultimately be implemented, and it is impossible for investors to predict the size of the gap between the two.

What’s happening in the housing market?

today Unsustainable housing market Consequences of higher mortgage rates, a Long-standing housing shortagesRising house prices and loss of purchasing power due to inflation.

🏠 Housing inventory is low: A balanced housing market usually has a supply of five to six months. Most markets today average about half that amount. Although we saw a boom in new construction in 2022, according to ZillowWe still have a shortage of about 4.5 million homes.

🏠 High mortgage Rates: At the beginning of 2022, mortgage rates were near historic lows at around 3%. As inflation rose and the Fed began raising interest rates to tame it, mortgage rates nearly doubled within a year. In 2024, mortgage rates are still high, effectively pushing millions of potential buyers out of the housing market. this It caused a slowdown in home saleseven during the typically busy months for home buying, such as spring and early summer.

🏠 Rate lock effect: Since the majority of homeowners are Locked in mortgage rates Less than 6%, and some as high as 2% and 3%, are reluctant to sell their current home because it would mean buying a new home with a much higher mortgage rate. Until mortgage rates drop below 6%, homeowners have little incentive to put their homes up for sale, leading to a scarcity of resale inventory.

🏠 House prices rise: Although demand for home purchases has been limited in recent years, home prices remain high due to a lack of inventory. The average price of homes in the United States was $434,568 In September, up 5.1% year over year, according to Redfin.

🏠 Severe inflation: Inflation increases the cost of basic goods and services, reducing our purchasing power. It also affects 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 this Buying a house Without knowing what you can afford, so set a clear budget for purchasing a home. Here’s what experts recommend before buying 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. Work towards a Credit score A score of 740 or higher will help you qualify for a lower rate.

💰 Save for a larger down payment. greater Initial payment It will allow you to get a smaller mortgage and get a lower interest rate from your lender. If you can afford it, making at least a 20% down payment will also eliminate the need for private mortgage insurance.

💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you Negotiate a better price. Experts recommend getting at least two or three loan estimates from different lenders before making a decision.

💰 Think about the equation of renting versus buying. choose for Rent or buy a house It’s not just comparing your monthly rent to your 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 interest rate on a mortgage is to buy it with 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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