Could Mortgage Interest Rates Start to Come Down This Year?

Key takeaways

• The average U.S. 30-year mortgage is now at 7.1%
• Inventory remains low and homeowners with cheaper deals from years prior aren’t moving, which is inflating house prices
• Estimates vary on when interest rates — and mortgages — might come down again

If you’re looking to buy a home, you might despair at the high interest rates we’re seeing. And with good reason — they’ve risen from an average of 3% at the start of 2022 to over 7% today. It’s impacting the housing market massively by keeping home buying and selling stuck in place.

The question on every would-be homeowner’s mind is whether interest rates will come down any time soon — and that all depends on how the battle with inflation is going. Here’s a breakdown of where we’re at with U.S. mortgage rates right now, and how the Fed’s goal to bring inflation down is going.

What’s happening with U.S. mortgage rates?

The average 30-year fixed-rate mortgage in the U.S., which is the most popular mortgage product, is now at 7.1%. That puts an average monthly payment at $2,823 for a 30-year fixed mortgage.

But we’re in a unique position where interest rates had to climb rapidly to counteract rampant inflation in 2022. That’s why a report from Redfin found nearly 92% of U.S. homeowners have a mortgage with an interest rate below 6% — because they locked in deals before interest rates climbed.

That’s left housing inventory low and pushed house prices up as high mortgage rates mean nobody wants to sell or move anytime soon. Zillow predicts property prices will increase 5.8% by the end of the year and by 6.5% next summer, making buying a home feel like a pipe dream for many.

Could the Fed cut interest rates soon?

Unfortunately, it’s too soon to tell whether the Fed will cut interest rates by the end of the year or even beyond. The latest inflation report showed headline inflation ticked upwards, while core inflation had continued to slow slightly — but both are at 4.7% and 4.3%, respectively, which is well over the Fed’s 2% target.

The red-hot labor market is also showing signs of weakening. The latest data on worker earnings revealed a 0.5% decline in actual average hourly earnings, while the unemployment rate hit 3.8%, the highest in months. But nonfarm payrolls increased by 187,000 for July, far above analyst expectations of 170,000 and suggesting there’s still a way to go before inflation is knocked on the head.

There are varying guesstimates of when the Fed might look to end its monetary tightening cycle and loosen interest rates once more. JPMorgan analysts have it as Morningstar economists predict in February before the year ends, and a Reuters poll of 97 economists puts the consensus prediction between April and June 2024.

If that’s the case, that means bond yields will start to come down again — and the 10-year Treasury bond tends to move in the same direction as mortgage rates. While they’re not directly tied, it’s an important benchmark for the mortgage industry that should convince lenders it’s time to reduce interest rates again.

The bottom line

Mortgages are significantly more expensive than they were just last year, and homeowners are paying the price. The only way forward is to bring inflation down, and that’s up to the Fed to decide whether the monetary tightening cycle has done enough to bring the economy in line.