How Low Could Mortgage Rates Drop with Fed Interest Rate Cuts?
The 30-year mortgage rate is on the decline, approaching 6% following the Federal Reserve’s interest rate cut on September 18. Just last November, rates were flirting with 8%, which could have been the peak for this cycle. This downward trend presents a fantastic opportunity for buyers who were holding out for better rates!
While the Fed doesn’t directly set mortgage rates, its decisions impact the market. The anticipation of lower interest rates, combined with cooling inflation, has played a key role in bringing mortgage rates down over the past year. We may continue to see lower rates ahead, depending on how closely the Fed’s actions align with market expectations and how other factors, such as inflation, play out.
What’s Happening in the Market? The current 30-year mortgage rates are a reflection of what the market expects the Fed to do next. The recent drop in rates suggests the market is predicting further cuts in short-term interest rates. If those predictions miss the mark, mortgage rates could creep back up. On the other hand, if the Fed cuts rates more aggressively, we could see mortgage rates fall even further.
Right now, the market expects short-term rates to be around 4% by the end of 2024, with the possibility of dropping to 3% by December 2025. If the Fed acts more decisively, mortgage rates could move lower, but if inflation spikes or the Fed shifts its focus, rates might rise again.
Could We Return to Ultra-Low Mortgage Rates? Remember those historically low rates of 2020-2021, when 30-year mortgages dipped below 3%? While it’s unlikely we’ll see those levels again anytime soon, Federal Reserve Chair Jerome Powell has indicated that we may not return to the era of ultra-low rates. Still, there’s always room for surprises in the economic landscape, so keeping a close eye on the market is crucial.
What Does This Mean for You? As we move forward, the key question will be: What is the new “normal” for short-term interest rates, and how quickly will the economy adjust? Right now, the expectation is that we’ll see short-term rates around 3% by late 2025. Since mortgage rates tend to add a bit of a premium to those short-term rates, we could see very attractive mortgage opportunities in the next few years.