On a normal day, it’s almost impossible to predict which way mortgage rates will go. Now, with so much uncertainty in the financial markets, mortgage rates could see more growth and volatility, especially after the January 20 presidential inauguration.
Earlier this month, the average rate for a 30-year fixed mortgage jumped above 7% and has yet to come down.
Many factors have pushed rates up recently. Strong economic data lowered expectations for a Federal Reserve rate cut, sending 10-year Treasury yields (a key benchmark for home loan rates) higher. The mortgage market was also rattled by concerns that the incoming Donald Trump administration will fuel inflation and increase government debt deficits.
Over the next few weeks, much will depend on what the president-elect says and does when he takes office, said Jacob Channel, senior economist at LendingTree. If Trump declares an economic emergency to impose tariffs or starts a war with Denmark, for example, mortgage rates would rise even more.
“Unless the president-elect’s tone becomes much more moderate and disciplined once he takes office, expect volatility to remain widespread,” Channel said.
After Trump’s inauguration, the Federal Reserve will hold its first policy meeting of the year. Although economists believe the Fed will not raise or lower interest rates on January 29, investors will be looking for some signal to inform their risk assessment and trading strategy, all of which could affect the direction of mortgage rates. .
Mortgage rate volatility in 2025
Based on the current situation, a significant drop in mortgage rates before the spring home buying season is unlikely, according to Valerie Saunders, chief executive strategist at the National Association of Mortgage Brokers.
It would take a sudden economic shock, such as the onset of a recession or rising oil prices, to see rates drop sharply. “Drastic changes in direction are usually the result of some significant event occurring somewhere that upends the financial markets,” said Keith Gumbinger, vice president of mortgage site HSH.com.
However, the geopolitical outlook, labor market and inflation data have the power to change mortgage forecasts.
Right now, aside from daily fluctuations, mortgage rates are expected to hover around 7% for the next few months. If inflation continues to cool and the Fed is able to make two 0.25% rate cuts this year, experts say mortgage rates could drop closer to 6.25% eventually.
Federal Reserve Governor Christopher Waller said Thursday that he is optimistic about easing inflation, which would allow the central bank to continue on its path to cutting interest rates in the first half of 2025. The central bank made three rate cuts of interest in 2024 and investors are now betting on another rate cut in June or July.
While the Fed influences the direction of general borrowing rates, it does not directly control the mortgage market. In fact, market forces often move in anticipation of Fed policy moves, relying on economic data and forecasts to gauge their expectations in the bond market.
“Because rising bond yields are due to anticipation of future events, if the narrative changes, bond yields could change,” said Kara Ng, senior economist at Zillow.
A look at the 2025 housing market
Today’s unaffordable housing market results from high mortgage rates, a persistent housing shortage, expensive home prices, and the 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. According to Freddie Mac, we still have a shortfall of about 3.7 million homes.
🏠 Raised mortgage fees: In early 2022, mortgage rates hit historic lows of around 3%. As inflation rose and the Fed raised interest rates to tame it, mortgage rates more than doubled. In 2025, mortgage rates are still high, driving millions of potential buyers out of the housing market.
🏠 Rate lock effect: Since most homeowners are locked into mortgage rates below 5%, they are reluctant to give up their low mortgage rates and have little incentive to list their homes for sale, leaving a shortage of inventory. resale.
🏠 High house prices: Although home buying demand has been limited in recent years, home prices remain high due to a lack of inventory. The median U.S. home price was $429,963 in November, up 5.4% year over year, according to Redfin.
🏠 Strong inflation: Inflation means an increase in the cost of basic goods and services, reducing purchasing power. It also affects mortgage rates: When inflation is high, lenders typically raise interest rates on consumer loans to ensure a profit.
What home buyers need to know
It’s never a good idea to rush into buying a home without knowing what you can afford, so set a clear home buying budget. Here’s what experts recommend before buying a home:
💰 Build your credit score. Your credit score will help determine if you qualify for a mortgage and at what interest rate. 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 allows you to get 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 private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three credit evaluations from different lenders.
💰 Consider renting. Choosing to rent or buy a home isn’t just about 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.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, where each point costs 1% of the total loan amount. One mortgage point equals a 0.25% reduction in your mortgage rate.
