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Mortgages

Mortgage Rates

Will Mortgage Rates Finally Fall This Year?

House on the edge about to fall with percentage signs around it

Prospective buyers waiting for mortgage rates to drop could have cause to be optimistic. But anyone expecting the ultra-cheap rates seen during the pandemic shouldn't hold their breath.

Housing economists have been predicting all year that borrowing costs would edge lower by December. Now that outlook just got a boost: A surprisingly weak jobs report on Aug. 1 raised the odds that rates on 30-year loans might finally slip out of the stubborn mid-6% range they've been averaging for most of the year.

Here’s the quick version of why: July’s job market added only 73,000 positions — far below the 117,000 economists expected. That disappointing number pushed investors into safer assets such as the 10-year Treasury note, driving its yield down from about 4.4% to 4.2% in a single day. Because mortgage rates usually move in the same direction as the 10-year yield, they dipped, too. As a result, the average mortgage rate for a 30-year fixed-rate loan dropped to its lowest level this year in Freddie Mac's benchmark survey.

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Mortgage rates can be notoriously fickle. Treasury yields react to economic news much faster than the national weekly mortgage rate surveys. But there's a chance the current downward trend could have a little more staying power. The jobs report is signaling economic weakness, and that could lead to what everyone's been waiting for: a rate cut by the Federal Reserve.

Jeff Taylor, managing partner at mortgage solutions company Mphasis Digital Risk, says that the Federal Reserve has the dual mandate to keep inflation under control and the job market as strong as possible. The central bank maintains a balance between these two objectives by adjusting the federal funds rate. Increasing short-term rates when inflation is high slows economic activity and price growth. Cutting rates promotes economic activity that adds jobs.

"Given how fast the job market weakened this summer… the odds of a rate cut in September spiked immediately, " Taylor says in an email to Money.

According to CME FedWatch, a market analysis tool that measures the likelihood of rate changes by the Fed, the probability of a rate cut next month jumped from about 47% on July 30 to about 92% after the jobs report came out on August 1.

How a Fed rate cut could affect mortgage rates

If the central bank does cut the federal funds rate, the effect on most mortgage rates won't be immediate. After all, the Fed's actions don't directly impact interest rates on long-term loans such as 15- and 30-year mortgages. But they will reduce overall borrowing costs, and that will eventually trickle down to mortgages as well.

Significantly lower rates aren't guaranteed, however, as there are economic factors that could derail the current downward trend. After the central bank cut rates last year, mortgage rates increased. Why? Because other data, such as strong employment numbers, retail sales, and wage growth, were indicating a stronger-than-expected economy, and inflation was still above the Fed's 2% target range.

In today's market, there are more signs of a contracting economy than an expanding one, which means the need for financial stimulus to keep the economy moving is greater. However, there is a wild card that could push mortgage rates back up: inflation.

"Inflation is the primary factor that would keep rates elevated," Taylor says. "Bond traders will typically sell when inflation is a threat, and this pushes rates higher regardless of what the Fed does."

Concerns over increasing consumer prices linger as recently imposed tariffs on imported goods are starting to take effect and could push inflation back above the 3% mark over the next few months.

So, while lower rates are good news for prospective homebuyers, there's still a chance they could reverse course and jump higher. Bottom line: If you’re house-hunting, keep an eye on rates — they may finally be headed in a friendlier direction.

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