The Federal Reserve has kept interest rates elevated for the past year, translating to stubbornly high mortgage rates. However, inflation is moderating, and the labor market is weakening, indicating that the economic tide is starting to turn.
Though the chance of an interest rate cut following the Federal Open Market Committee’s July 30-31 meeting is minuscule, prospective homebuyers could start dusting off their mortgage calculator as soon as late September.
Mortgage rates already hinted at a downward streak this month. The average rate for a 30-year fixed mortgage was 7.09% at its height this month. As of Monday, it’s coming in at 6.86%, according to data from Bankrate, CNET’s sister site.
This week’s meeting could ‘move markets’
Though the central bank won’t be slashing rates this week, housing market experts will be laser-focused on Fed Chair Jerome Powell’s assessment of the economy during Wednesday’s press conference.
“It’s really what Powell says after that will move markets,” says Nicole Rueth, senior vice president at the Rueth Team powered by Movement Mortgage. If Powell signals a rate cut is due in September, mortgage rates may see some slight downward movement. The Fed’s post-meeting press conference could either solidify expectations for lower rates or put them on shaky ground.
In fact, speculation about a fall rate cut is a big reason why mortgage rates, which are partly influenced by investor expectations, have been trending down below 7%. But homebuyers shouldn’t expect any dramatic declines just yet.
“The likelihood of a Fed rate cut is only as good as today’s economic news,” says Greg Sher, managing director at NFM Lending. Future inflation readings and other economic data, including labor reports, between now and September could shift the balance once again.
Will the Fed lower rates this fall?
Most experts are betting on a rate cut in September. “Not only is inflation cooling, but it’s also the last opportunity to cut before the Presidential election,” says Erin Sykes, chief economist at NestSeekers International. The Fed typically tries to avoid making major monetary policy decisions too close to an election.
However, some say even one rate cut this year is an overly optimistic expectation.
“I don’t see [a rate cut] happening,” says Ken H. Johnson, housing market economist at Florida Atlantic University. Johnson warns that lower rates could drive up demand, which could cause housing costs to soar again, along with inflation.
Will mortgage interest rates fall in 2024?
When the Fed starts cutting interest rates, borrowing rates for home loans will also go down. Most economists and housing market experts expect the average rate on a 30-year fixed mortgage to decrease by about half a percentage by the end of the year.
“I think 6.5% is a fair target for early 2025,” says Sykes. Over the long term, Sykes believes mortgage rates will end up around 6%, marking a healthy balance between the extreme low-high vacillations we’ve seen since 2020.
Other factors affecting the housing market right now
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.
A balanced housing market typically has five to six months of supply. Most markets today average around half that amount. Even though we saw a surge in new construction in 2022, according to Zillow, we still have a shortage of around 4.5 million homes.
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 homebuying months, like the spring and early summer.
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.
Though homebuying demand has been limited in recent years, home prices remain high because of a lack of inventory. The median US home price was $419,300 in May, up 5.8% on an annual basis, according to the National Association of Realtors.
High home prices make it difficult for prospective buyers to afford a down payment and the cost of carrying a large mortgage. According to a recent study from CNET’s sister site, Bankrate, prospective buyers need an annual income of more than $100,000 to afford a median-priced home.
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.
Even though the inflation rate has been cooling over the past year from its peak of 9.1% a few years ago, price growth is still significant. The most recent inflation data shows annual inflation at 3%, which is still above the Fed’s 2% target rate.
Will mortgage rates ever be 3% again?
A few years ago, homebuyers could take out home loans with rates between 2% and 3%. Mortgage rates will fall over the next year, but they won’t reach those levels. Housing market experts say it would take a significant economic crisis for mortgage rates to drop below 3%.
Read more: You Won’t Get a 2% Mortgage Again. How to Adjust to a Different Housing Market
There is no single “average” mortgage rate. They vary significantly depending on how each source, whether that’s a lender or a government-backed agency like Fannie Mae, compiles their data. It’s likely you see a difference of several percentage points between two sources.
Expert advice for homebuyers
It’s never a good idea to rush into a major purchase like buying a home without knowing what you can afford, especially with current interest rates. In addition to having a clear homebuying budget, here’s what experts recommend:
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, putting down 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.
