Mortgage rate forecast: Holiday week brings higher rates

The holiday season is not the best time for the housing market. Fewer people buy and sell homes during the winter months, leading to a drop in home loan applications.

In addition, mortgage rates hit their highest levels in weeks. Following the Federal Reserve third rate cut at its December meeting, the average 30-year fixed rate bounced back to its peak in November of around 7%.

Although the Fed influences the direction of overall lending rates, it does not directly control the mortgage market. Mortgage rates are driven by investor expectations and move with the 10-year Treasury yield, with multiple factors influencing the bond market. For mortgage rates to reverse their upward trend, investors in the bond market must be convinced that the economy is cooling.

While there is no evidence that inflation is easing and the labor market is softening, mortgage interest will remain elevated for the foreseeable future. The Federal Reserve is forecasting a slower rate cut during 2025which is likely to keep average interest rates somewhat volatile, ranging between 5.75% on the low end and 7.25% on the high end, according to HousingWire’s 2025 Forecast.

Read more: 2025 Mortgage Rate Forecast

Why are mortgage rates higher after the Fed cut rates?

The recent spike in long-term Treasury yields and home loan rates is due in large part to the Fed’s recently updated Summary of economic forecastsoutlining expectations for just two rate cuts of 0.25% in 2025, down from four previously.

To maintain maximum occupancy and containing inflation, the Federal Reserve evaluates economic data to determine whether to raise or lower its benchmark short-term interest rate. Investors care about the Fed’s future outlook for interest rate adjustments because it informs their trading strategy and risk assessment.

Markets weighed heavily this month on Fed Chairman Jerome Powell’s concerns about rekindling inflation and President-elect Donald Trump’s tax and tariff proposals. Powell struck a more conservative tone about future policy changes: “When the road is uncertain, you go a little slower.”

Following the lead of the “dodgier Fed,” bond prices and the stock market quickly collapsed, according to Matt Graham on Mortgage News Daily. Hawkish monetary policy tends to be more restrictive, relying on higher interest rates to control inflation.

Although the Fed moved to cut interest rates as early as September, it is wary of easing too quickly just to see progress in stopping inflation or reversing course entirely. Experts say the Fed is likely to delay further tapering until March or even later.

Where are mortgage rates headed in 2025?

Although experts had optimistically predicted rates to fall close to 6% by the end of 2024, the forecasts have changed significantly. Fannie Mae now expects average 30-year fixed mortgage rates to remain above 6.5% until early 2025.

“If the Fed does cut just twice next year, it’s possible that mortgage rates will stay pretty similar to where they are now,” said Chen Zhaohead of economic research at Redfin.

Aside from normal day-to-day volatility, mortgage rates will remain above 6% for some time. This may seem high compared to the latter 2% rates since the pandemic era. But experts say a drop below 3% on a 30-year fixed mortgage is unlikely without a major economic downturn. Since the 1970s, the average rate for a 30 year fixed mortgage is about 7%.

Given a new administration, changes in the geopolitical outlook and the risk of a rebound in inflation, forecasts may change again in the coming months. The future movement of the rate depends on a range of factors, including:

Trump’s economic policy: of Trump proposals to reduce taxes and tariffs are a big wild card for mortgage rates. Experts say such moves could boost demand, widen deficits and push inflation back up. This could cause the Fed to delay future rate cuts, which in turn will keep home mortgage rates high.

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

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

Potential curveballs: Bond investors often act in anticipation of what they believe will happen in the economy. For example, if unemployment is expected to rise, bond yields and mortgage rates will fall. But if the result does not meet market expectations, the yield can quickly rise or fall.

Other unknowns: Although Trump’s policies have led to expectations of higher inflation and budget deficits, there is still much uncertainty about the timing and content of economic changes. Campaign promises rarely reflect the policies that end up being implemented, and it’s impossible for investors to predict how big the difference between the two will be.

What else is happening in the housing market?

Today’s unaffordable housing market result of high interest rates on mortgage loans, a a long-standing housing shortageexpensive housing prices and 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 about half that amount. Although we saw a spike in new construction in 2022, according to Zillowwe still have a shortfall of about 4.5 million homes.

🏠 Increased mortgage rates: Early 2022 mortgage rates were near historic lows of around 3%. As inflation soared and the Fed began raising interest rates to tame it, mortgage rates roughly doubled within a year. In 2024 mortgage rates are still high, effectively pricing millions of prospective home buyers out of the housing market. That’s it led to a slowdown in home saleseven during the typically busy home buying months like spring and early summer.

🏠 Speed ​​lock effect: Since the majority of homeowners are locked in mortgage rates below 6%, with some as low as 2% and 3%, they are reluctant to sell their current homes as 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 shortage of resale inventory.

🏠 High housing prices: Although housing demand has been limited in recent years, home prices remain high due to a lack of inventory. The median home price in the US was $434,568 in September, up 5.1% year over year, according to Redfin.

🏠 Steep inflation: Inflation increases the price 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 offset the loss of purchasing power and ensure a profit.

Should you wait or buy now?

It’s never a good idea to rush buying a home without knowing what you can afford, so establish a clear home buying budget. 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. Working towards a credit rating of 740 or higher will help you qualify for a lower rate.

💰 Save for a bigger down payment. Bigger 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, a down payment of at least 20% will also eliminate the need for private mortgage insurance.

💰 Search for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help negotiate a better price. Experts recommend getting at least two to three loan appraisals from different lenders before making a decision.

💰 Consider the rent vs. buy equation. Choosing to rent or buy a home it’s not 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 0.25% off your mortgage rate. Typically, each point will be worth 1% of the total loan amount.

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