Mortgage rates hit 7% for the first time since May 2024 on Thursday, providing another drag in an already tough housing market.
The climbing mortgage rates come even after the Federal Reserve cut interest rates by a full percentage point in recent months — which had raised hopes among homebuyers that the costs of financing a house might come down.
But instead, mortgage rates have climbed. What gives? And what does this tell us about the outlook for the housing market this year?
Here are four things to know about mortgage rates and the housing market.
Why are mortgage rates getting higher even if the Fed is cutting rates?
To answer that it's good to remember that the Fed can influence mortgage rates, but it doesn't set them.
In a nutshell, the Fed sets short-term interest rates, but mortgage rates mainly follow a different number: the yield on 10-year Treasury bonds.
That yield has risen sharply in recent months due to a number of reasons. Inflation has stayed sticky, which means the Fed might be more cautious in cutting rates further.
And the economy is strong. That means the Fed can afford to wait longer to cut interest rates, especially since a stronger economy can also contribute to higher inflation.
It's also worth remembering that although 7% may feel high given that mortgage rates had dropped to as low as 2.65% in early 2021, they are not high historically speaking.
In fact, these mortgage rates were frequently at 6% or 7% or even higher at times in the 1990s and early 2000s and were in the double digits during the 1970s and 1980s.
But that's likely little consolation for homebuyers who had gotten used to low mortgage rates in recent years, especially since home prices have risen so much. The median sales price of an existing home has risen 50% in the last five years.
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So where are mortgage rates headed?
That's difficult to answer, since mortgage rates are affected by many factors.
But there's one thing that experts generally agree on: They're unlikely to return to the low levels we saw just a few years ago.
"They should decline some," says Sam Khater, Freddie Mac's Chief Economist. "But I think the new normal is 6 to 7% in this world of strong economic growth and steady inflation."
For now, it's hard to see bond yields going down substantially. The Fed has projected it will cut interest rates only two more times this year, which would likely keep bond yields higher. That means mortgage rates could also stay higher, which would be bad news for homebuyers.
How the housing market is looking in the year ahead
High mortgage rates will provide some additional headwinds for the housing market as it looks to recover from a tough year.
Final totals haven't yet been released, but 2024 was on track to have the fewest existing home sales since 1995. Several factors were driving slow sales in addition to elevated mortgage rates. Low inventory — along with a surge of home buying during the pandemic — also had an impact.
Bob Broeksmit, President and CEO of the Mortgage Bankers Association, said in a statement that "the upward drift in mortgage rates … is dampening homebuyer demand." Mortgage applications to buy a home were down 2% from a year ago, he says.
But Khater at Freddie Mac says he expects the housing market will be fine.
"Home prices and the real estate market will be able to withstand the higher rate environment because the economy is strong," he says.
Khater believes that there are households who will not necessarily be deterred by the high mortgage rates, including many first-time homebuyers.
"There's a large segment of renters that are affluent enough and reaching their mid-thirties and early forties that want to buy," he says "And so there's a lot of sort of latent demand that's there that I think is waiting to jump in the market."
So what does this mean for homebuyers?
Well, it's tough, but there are a couple things. One is to shop around with different mortgage lenders to see who can give you the best rate. Talking to multiple lenders really does make a difference — and of course a lower mortgage rate means a lower payment each month.
Second, if you're feeling frustrated by what you can afford, you might need to expand where you're looking, and consider different neighborhoods or locations in your metro area.
Prices can vary a lot — so if it feels like you're striking out, it could pay to expand your search.
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