Good news for borrowers: the wait for lower interest rates may be over soon. Mortgage rates have been gradually falling as inflation and the economy have slowed, and they are likely to decline even further in the coming months and years.
The bad news is that interest rates are unlikely to return to the historic lows seen in 2020 and 2021. And as rates fall, homebuyers will likely face additional challenges, such as more competition and rising housing costs.
Understanding Mortgage Rates and Their Impact on the Housing Market
Mortgage rates fluctuate from day to day, and the present trend can have a significant impact on homebuying demand.
When mortgage rates are low, homebuying demand often increases. Low interest rates increase purchasing power and make it easier for prospective purchasers to afford a house purchase. However, a rise in demand might cause upward pressure on property prices, negating some of the gain.
Mortgage rates fluctuate from day to day, and the present trend can have a significant impact on homebuying demand.
When mortgage rates are low, homebuying demand often increases. Low interest rates increase purchasing power and make it easier for prospective purchasers to afford a house purchase. However, a rise in demand might cause upward pressure on property prices, negating some of the gain.
High mortgage rates tend to have the opposite effect on demand. Because mortgages become more expensive, many purchasers leave the market to wait for rates to fall again. This can help limit costs from rising too quickly, but it's not always the case.
As home prices surged to record highs in 2022 and 2023, many would-be home sellers preferred to remain in their homes rather than sell and lose their historically low mortgage rates. This tendency, known as the "lock-in effect," limited housing supply and raised prices since there were insufficient homes on the market to fulfill buyer demand.
As home prices surged to record highs in 2022 and 2023, many would-be home sellers preferred to remain in their homes rather than sell and lose their historically low mortgage rates. This tendency, known as the "lock-in effect," limited housing supply and raised prices since there were insufficient homes on the market to fulfill buyer demand.
Factors influencing mortgage rates
Mortgage rates are determined by a number of different economic influences, including investor demand for mortgage-backed securities, the current rate of inflation, Federal Reserve policy, and even geopolitical uncertainty.
In general, mortgage rates tend to go up when the U.S. economy is doing well or growing quickly, while slowing growth or a recession can push rates down.
Rates also vary by state, so where you live can determine how much you'll pay to get a mortgage. Your individual financial profile, including your credit score, down payment, and debt-to-income ratio, will help determine the exact rate you get as well.
Why are mortgage rates so high?
Mortgage rates initially dropped to historic lows in 2020 and 2021 after the Fed cut the federal funds rate to near zero to avoid a pandemic-induced recession. Then, as the Fed quickly raised rates to combat record high inflation, mortgage rates climbed.
Inflation has slowed significantly since it peaked in June 2022, when prices had risen 9.1% year over year, according to the Bureau of Labor Statistics. In June 2024, the Consumer Price Index was up just 3.0% year over year, a downtick from the previous month's reading.
As long as inflation continues to cool, the Fed is expected to start lowering its benchmark rate later this year. This should help mortgage rates ease.
What are today's mortgage rates?
Mortgage rates have been trending down for several months now, which is good news for borrowers. But compared to where they've been in the last decade, rates are still relatively high today. This has kept homebuying demand low.
