Good News for Homebuyers: Mortgage Rates Are Poised To Fall

Mortgage rates are poised to begin coming down.

The U.S. Federal Reserve isn’t expected to announce another interest rate hike in the wake of the banking crisis, especially as the inflation the Fed has been fighting continues to slow. The change in policy could give mortgage interest rates some room to come down. (Mortgage rates are separate from the Fed’s short-term rates, but they have been following a similar upward trajectory.)

Inflation was still up 4.9% year over year in April but dipped slightly from the previous month, when it was 5% year over year, according to the government’s consumer price index released on Wednesday. Decelerating inflation takes some of the pressure off of the Fed to keep raising rates. The Fed is also likely to avoid adding further strain on the banking industry, after several recent, high-profile bank failures.

“It will prevent mortgage rates from climbing too much higher,” says Realtor.com® Chief Economist Danielle Hale of the Fed ending its rate increases. “I expect them to gradually come down.”

She anticipates mortgage rates will stabilize over the short term and then begin dropping by the late summer and early fall. Rates could eventually return to the 5% and high 4% range. But those longing for the days of rock-bottom rates, such as when they fell below 3% during the COVID-19 pandemic, shouldn’t get their hopes up.

Mortgage rates averaged 6.68% for 30-year fixed-rate loans on Tuesday afternoon, according to Mortgage News Daily.

“We should expect to see mortgage rates decline as we move toward year end,” says David Stevens, CEO of Mountain Lake Consulting. The Moneta, VA-based consultancy focuses on the mortgage and real estate industries. “Rates will be closer to 5.5% by the end of this year.”

The Catch-22 of the mortgage market is that for mortgage rates to really drop, the economy will have to take a hit. The Fed has been aiming for a “soft landing” in which it is able to bring down inflation without plunging the country into a recession. It’s a tricky landing for the Fed. If anything goes wrong or the bank failures continue, the Fed might have to cut its rates to stimulate the economy. That will likely lead mortgage rates to fall.

Once rates drop below 6%, homeowners are expected to begin listing their homes for sale again, easing the housing shortage. Many haven’t wanted to trade up or down into new homes as doing so would require securing new mortgages with higher rates. Those homes will likely be snapped up quickly by eager buyers.

In the meantime, stable and beginning-to-fall mortgage rates are good for the housing market.

“It’s going to give buyers and sellers a chance to adapt to where mortgage rates are and factor it into their decision-making,” says Hale.

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