The Federal Reserve has a dual mandate from Congress: to maintain “maximum employment” and “stable prices.” Since spring 2022, Fed Chair Jerome Powell has focused on inflation. However, with inflation nearing the 2% target and the unemployment rate slightly rising, starting this month—when the Fed is expected to make its first rate cut—the central bank’s focus will likely shift toward employment. While the Federal Reserve doesn’t directly set long-term rates, including mortgage rates, these rates often move in response to anticipated future economic and monetary conditions. In fact, amid recent cooling labor market data and the increased likelihood of Fed rate cuts, mortgage rates have come down slightly in recent months. Last week, the average 30-year fixed mortgage rate tracked by Freddie Mac came in at 6.35%, well below the 7.22% peak reached in May of this year. To find out where mortgage rates and the housing market could go from here, LendingOne analyzed the latest housing market data and rate forecasts.
LendingOne Top Findings:
- Most forecasters expect mortgage rates to fall further over the coming year—but not a huge drop.
- Despite the recent drop in mortgage rates, turnover in the resale market still remains low.
- Refi activity is finally starting to pick up.
Future Rate Projections:
Looking ahead, most forecasters expect mortgage rates to gradually come down a bit; however, without a recession, the decrease might not be as significant as some investors would like. The Mortgage Bankers Association expects 5.9% by Q4 2025. Fannie Mae also expects 5.9% by Q4 2025. Wells Fargo expects 5.8% by Q4 2025. If the labor market begins to weaken faster than expected, or the jobless rate spikes, short-term and long-term interest rates could fall faster than expected. While if the labor market tightens up, or inflation picks back up, we could get fewer cuts than currently expected.
Will Lower Rates Lead to More Home Sales?
The recent dip in mortgage rates and slightly improved housing affordability have yet to make a noticeable impact on sales activity. In fact, the Mortgage Purchase Application Index, a proxy for future existing home sales, is still hovering near multi-decade lows. The first thing to keep in mind is that this mortgage rate dip is occurring during the seasonally soft window. If the mortgage rate dip holds and the job market remains strong, it could lead to more activity in spring 2025. Another important point is that even with this mortgage rate drop, the "lock-in effect" is still in play, which will slow the bounce back for existing home sales. Many homeowners who would like to sell and buy something else are staying put, rather than facing a higher mortgage rate and monthly payment.
Refinancing Gains Momentum
One area that has seen some improvement from the recent mortgage rate dip: Refi. Refinancing has gained momentum as borrowers who secured rates above 7.0% in the past 24 months take advantage of the recent dip for some relief. While this isn’t a refi boom—at least not yet—it does represent an improvement from the multi-decade lows reached during the mortgage rate shock. To really jumpstart the refinancing market and the second mortgage market, the average 30-year fixed mortgage rate would likely need to approach 5.5%.
Final Thoughts
While we've seen a slight dip in mortgage rates over the past year, with forecasters expecting this trend to continue into 2025, investors should remember that predicting interest rates has been especially challenging in recent years. This is due to the lingering effects of the pandemic, lockdowns, record-low rates, massive stimulus, inflation shocks, and the fastest rate-hiking cycle in decades. Stay informed with our latest news and advice by visiting our blog. And when you’re ready to take the next step, learn how our loan products can help you achieve your investment goals.