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Home mortgage interest rates are unlikely to drop anytime soon, despite comments by the Chicago Federal Reserve CEO during a recent Des Moines visit that rates could drop within a year, say a pair of economists who follow the residential market.
Austan Goolsbee, the former Obama administration economic adviser who has headed the Chicago Fed since January 2003, told The Des Moines Register in early June that before President Donald Trump announced tariffs on “Liberation Day,” April 2, he thought interest rates would fall over the next 12 to 18 months. He said he still thought interest rates could be lower in “nine to 12 months.”
Rates on 30-year mortgages began escalating from historic lows in 2021 and reached a high of nearly 8% in late 2023. They have been entrenched between 6% and 7% for about a year, according to federal lender Freddie Mac.
Economists from U.S. Bank and financial services firm Bankrate said that before the April 2 tariff announcement, home mortgage rates had appeared likely to drop. But now, they say, it’s unlikely there will be any decline soon.
Bankrate.com Chief Financial Analyst Greg McBride said that even if the Federal Reserve lowers its benchmark interest rate in the next few months, mortgage rates are unlikely to drop below 6% anytime soon “unless the economy rolls over.”
“If the economy really slows, mortgage rates could fall, but that’s not the backdrop where most people are comfortable buying a house,” McBride said. “If we avoid a recession, mortgage rates are more likely than not to remain above 6% for the balance of the year.”
John Hummel, U.S. Bank head of retail home lending, also had thought earlier this year that a rate drop was coming.
“We all stepped into 2025 thinking it would be a more favorable rate environment,” Hummel said. “It’s been anything but that.”
Why haven’t rates fallen?
McBride shared Goolsbee’s outlook earlier in the year that with stable employment and moderating prices and inflation, rates were likely to come down.
“I think that’s a very accurate assessment because with inflation moving closer to 2%, the economy growing, but slower, the labor market expanding, but slower, things would be set up nicely for the Fed to start taking the foot off the brake pedal, cutting short-term rates to a less-restrictive level,” McBride said.
But then came Trump’s fluctuating tariff policies, creating uncertainty for consumers and businesses.
“The reason they haven’t done that is because there’s a lot of uncertainty about what’s going to happen with inflation in the coming months due to tariffs,” McBride said. “So if it wasn’t for that, I would agree with him that interest rates would otherwise be poised to be coming down.”
Hummel said U.S. Bank expected a 2025 average 30-year-mortgage rate of “about 5.8%.”
“I don’t think we ever anticipated something really low,” he said. “We just thought there would be a modest decline in rates and maybe we could find ourselves back below 6.5%.”
However, “In early January, we started realizing that we’re looking at probably an average rate of anywhere from 6.5% to 6.8%, and we’ve been touching on 7%,” he said.
Could the Federal Reserve lower interest rates this year?
The Fed cut its benchmark rate by a combined total of 1 percentage point last year but so far in 2025 has made no further cuts.
That could change, Hummel said, noting encouraging signs for the economy. Iowa’s unemployment rate is below the national average and the Bureau of Labor Statistics’ Consumer Price Index rose 2.4% over the last 12 months, close to the Fed’s goal of keep inflation at 2%.
“I think the Fed needs to start to see that come down and stay at a sustained level” before it cuts rates more, Hummel said.
U.S. Bank believes that the Fed may cut interest rates in the fourth quarter, he said, adding, “I think they’re being overly cautious.”
McBride is worried that with the turmoil surrounding the tariffs, interest rates will only fall if the economy is in a downturn.
“It’s been the single biggest factor in the economy in the past few months,” McBride said of the tariffs. “Businesses that have a lot of uncertainty, they don’t go out and hire a bunch of people. They don’t expand production. They don’t make investments. That in and of itself becomes an economic headwind.”
By December, he said, the impact of tariffs could be clear and could set the stage for the Fed to cut rates, but ”we want the Fed to be cutting rates because inflation pressures have subsided. We don’t want the Fed cutting rates because the economy is rolling over.”
How strong are home sales?
Meanwhile, despite the stalled interest rates, Des Moines metro home sales are up, rising 2.4% year over year in May, according to the Des Moines Area Association of Realtors. Nationally, home sales decreased 2% in April from the same month in 2024, according to the National Association of Realtors.
“Pent-up housing demand continues to grow, though not realized,” National Association of Realtors chief economist Lawrence Yun said in a news release. “Any meaningful decline in mortgage rates will help release this demand.”
Mortgage rates around 7% robbed homebuyers of one-third of their purchasing power as compared to December 2020, when the average 30-year mortgage rate hit a 30-year-low of 2.65%, McBride said.
“That in and of itself is akin to a 35% increase in home prices, which comes on top of very heady price appreciation,” he said.
No matter what happen with interest rates, prospective home buyers should pay reduce their debts and save money, he said.
“Control what you can control,” he said. “Pay down debt. Boost your savings. Invest in yourself. Finish up that certification. Get that additional training that leads to the promotion or pay raise.”
Reuters contributed to this report.
Philip Joens covers retail and real estate for the Des Moines Register. He can be reached at 515-284-8184 or pjoens@registermedia.com.
