Mortgage Rate Predictions: The Aftermath of a Fed Rate Cut and the Election

The Federal Reserve delivered a 0.25% interest rate cut last week. But prospective homebuyers wishing for lower mortgage rates are likely to be disappointed.

While the central bank influences home loan rates, it doesn't directly set them.

In fact, mortgage rates are going on their sixth week of increases. That's despite the Fed having made an even bigger 0.5% rate cut in September. According to the data we pull from Bankrate, today's average rate for a 30-year fixed mortgage is 6.88%. Since early October, rates have increased nearly 0.75%. The extreme surge was due largely to a spate of robust economic data and uncertainty surrounding last week's election.

In particular, investors' anticipation for a Donald Trump victory stoked bets on economic policy shifts that could increase deficits and inflation, said Logan Mohtashami, lead analyst at HousingWire. Before the election results were even confirmed, bond yields and mortgage rates had moved significantly higher.

Experts tell me a series of Fed rate cuts combined with weaker economic data still point to a longer-term trend of declining borrowing rates on home loans. But the question now is whether recent data and the next administration's plans for the economy will impact the central bank's future decisions.

Prospective homebuyers, or homeowners looking to refinance, will need to be patient. Recent volatility aside, there tends to be a lag between when the central bank starts cutting rates and when mortgage rates begin to consistently fall.

Will there be postelection volatility in the mortgage market?

It seems counterintuitive that mortgage rates increased so much last month, given the Fed's decision to start easing interest rates. Many expected home loan rates to walk in the same direction as the Fed's benchmark interest rate. But mortgage rates also respond to an interplay of economic factors, including inflation and labor data, investor expectations, geopolitical events, and shifts in the bond market.

The economic data we got after the Fed's September cut was unexpectedly strong, with labor reports indicating a robust economy. That altered investors' outlook for the pace of future rate reductions. Strong job creation can fuel inflation (which mortgage rates are highly sensitive to) and could prevent the Fed from making steep rate cuts next year. 

There were also pre-election jitters circling through financial markets. Political instability can lead to panic from investors, which can result in more volatility with bond yields and mortgage rates. Leading up to the election, investor uncertainty drove demand for bonds and pushed yields higher, said Jacob Channel, senior economist at Lending Tree. "The higher 10-year treasury yields go, the higher mortgage rates go."

But investors can be prone to overreaction and often act defensively to "price in" the extreme of any one economic data point or event. In anticipation of Trump's victory, the bond market already assumed higher inflationary pressures resulting from the election outcome, according to Colin Robertson, founder of housing market site, The Truth About Mortgage. Because the market drove up rates before the election, Robertson expects there to be some rate relief, though there won't be any dramatic drops.

There's still a lot of uncertainty surrounding future economic data and the Fed's next steps. As the dust settles from the election, some of the recent volatility in bond yields and mortgage rates should smooth itself out, said Beth Ann Bovino, chief economist at U.S. Bank. "But the uncertainty around the data flow and what the Fed will do next will be with us for a while," said Bovino.

How will future 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 interest rates up or down. 

Since early 2022, the central bank has been 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 has pivoted to cutting interest rates to avoid a job-loss recession. However, it's also wary of easing interest rates too quickly only to see inflation reheat. 

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.

The Fed has made two rate cuts so far this year. According to the Summary of Economic Projections, we could see another 0.25% cut during the Fed's final policy meeting of 2024 on Dec. 18. But nothing is guaranteed. In his post-meeting remarks, Fed Chair Jerome Powell left the door open to pausing rate cuts in December, citing the stronger-than-expected economic data following its jumbo rate cut in September. 

"We're just going to have to see where the data leads us," Powell said.

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

What are longer-term predictions for mortgage rates? 

Most housing market forecasts imply that mortgage rates will decrease in the last three months of 2024 and continue to fall all next year. But no one has a crystal ball when it comes to the mortgage market. All forecasts are estimates at best. 

What we know is that 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.  

To meet forecasters' projections of average 30-year fixed mortgage rates around 6% by the end of the year, rates will need to decline decisively. That won't happen without both weaker inflation and labor data as well as another Fed rate cut in December. Looking further out, experts say rates could fall into the mid-5% range later next in 2025. But again, it all hinges on incoming economic data, investor expectations and the pace of future Fed cuts.

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 out millions of prospective buyers from 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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