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Mortgage rates have been rising in recent months, even though the Federal Reserve has lowered interest rates.
Economists and other financial experts say these adverse movements may seem counterintuitive, but they are driven by market forces and are unlikely to ease much in the short term.
As a result, people considering buying a home may be forced to make difficult choices. They can delay home purchases or push current mortgage rates forward. Experts say the latter option is complicated by soaring home prices.
“If you’re expecting or hoping that interest rates will go to 4% or that house prices will fall by 20%, I personally think it’s unlikely that either will happen in the near future,” Lee Baker said. I think so,” he said. He is a certified financial planner based in Atlanta and a member of CNBC’s Council of Financial Advisors.
7% mortgage rates mean a ‘dead’ market
Interest rates on 30-year fixed mortgages rose more than 7% in the week ending Jan. 16, according to Freddie Mac. It has been gradually rising since late September, when it hit a recent low of nearly 6%.
As of November 2021, before the Fed sharply raised borrowing costs to curb high inflation in the U.S., consumers were paying less than 3% for a 30-year fixed mortgage, so current interest rates are It’s a bit of a whiplash for some people.
“If it gets above 7%, the market is dead,” said Mark Zandi, chief economist at Moody’s. “No one will buy it.”
He said mortgage rates needed to get closer to below 6% “for the housing market to come back to life.”
Financial calculations show why. According to Bankrate’s analysis, a consumer with a 30-year, $300,000 5% fixed mortgage will pay approximately $1,610 per month in principal and interest. At 7%, you’ll pay about $1,996, or about $400 more per month.
Meanwhile, the Federal Reserve began lowering interest rates in September as inflation slowed. The central bank cut the benchmark interest rate by 1 percentage point three times during that period.
Despite these changes in Fed policy, mortgage rates are unlikely to return to 6% until 2026, Zandi said. He says there is potential power that is “not going away anytime soon.”
“It’s very likely that mortgage rates will rise before they ease,” Zandi said.
Why have mortgage interest rates increased?
First thing to know: Mortgage rates are more closely tied to the yield on the 10-year Treasury than the Fed’s benchmark rate, said Baker, founder of Claris Financial Advisors.
Yields on those bonds stood at about 4.6% as of Tuesday, up from about 3.6% in September.
Investors who buy and sell government bonds affect their yields. Experts say prices appear to have risen in recent months as investors worry about the impact on inflation of President Donald Trump’s policy proposals.
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Policies such as tariffs and mass deportations of immigrants are expected to increase inflation, experts say. If that happens, the Fed could cut borrowing costs even more slowly, or raise them again, experts said.
Indeed, Fed officials have recently cited “upside risks” to inflation, citing the potential impact of changes in trade and immigration policy.
Investors are also concerned about how the massive tax reform expected under the Trump administration will increase the federal deficit, Zandi said.
There are other factors that influence government bond yields.
For example, while the Federal Reserve has reduced its holdings of U.S. Treasuries and mortgage-backed securities through quantitative tightening, Chinese investors have become “more cautious” in purchasing U.S. Treasuries, and Japanese investors have been “more cautious” in purchasing Treasuries. Interest is waning because profits can be made. It’s their own bond, Zandi said.
Joe Seidle, senior market economist at JPMorgan Private Bank, said mortgage rates “probably won’t go below 6% until 2026, assuming everything goes as expected.”
Mortgage premiums are historically high
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Lenders typically price their mortgages higher than the yield on 10-year U.S. Treasuries.
The premium, also known as the “spread,” averaged about 1.7 percentage points from 1990 to 2019, Seidl said.
The current spread is approximately 2.4 percentage points, which is approximately 0.7 percentage points higher than the historical average.
There are several reasons for the rise in spreads. For example, market volatility caused lenders to take a more conservative stance in mortgage underwriting, and that conservatism was further exacerbated by the 2023 regional bank “shock.” said Seidr.
“Overall, 2025 is likely to be the year in which housing affordability remains a serious challenge,” he said.
Seidl said the premium increases are “exacerbating the housing affordability challenge” for consumers.
The typical homebuyer paid $406,100 for an existing home in November, up 5% from $387,800 a year earlier, according to the National Association of Realtors.
What can consumers do?
In today’s housing and mortgage market, financial advisor Baker encourages consumers to ask themselves, “Is buying a home the right financial move for me right now?” Or will you be a renter, at least for the time being?
People looking to buy a home should try to make a “large” down payment to reduce the size of their mortgage and make it easier to fit into their monthly budget, Baker said.
Don’t expose your down payment savings to the vagaries of the stock market, he says.
“That’s not what you should bet on in the market,” he said.
Savers can still earn returns of about 4% to 5% from money market funds, high-yield bank savings accounts, certificates of deposit, and more.
Some consumers may prefer an adjustable rate mortgage instead of a fixed rate mortgage. While this approach may give consumers better mortgage rates now, changes in interest rates could force buyers to pay more later, Baker said.
“You’re making a bet,” Baker said.
For example, this approach is not recommended for people on a fixed income in retirement. That’s because it’s unlikely your budget will have room for higher monthly payments in the future, he said.
