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Mortgage rates have risen in recent months, while the Federal Reserve has cut rates.
While these counterintuitive moves may seem counterintuitive, economists and other financial experts say they are the result of market forces that are unlikely to diminish much in the near term.
This can present potential home buyers with a difficult choice. They can postpone purchasing their home or continue with the current mortgage interest rate. The latter option is made more difficult by high house prices, experts say.
“If you’re hoping or longing for 4% interest rates, or a 20% drop in home prices, I personally don’t think either of those things are remotely likely in the near term,” says Lee Baker. a certified financial planner based in Atlanta and member of CNBC’s Financial Advisor Council.
A mortgage interest rate of 7% means a ‘dead’ market
Rates for a mortgage with a term of 30 years jumped above it 7% during the week ending Jan. 16, according to Freddie Mac. They have been gradually rising since late September, when they reached a recent low of almost 6%.
Current interest rates represent a shock to consumers, who were paying less than 3% on a 30-year mortgage in November 2021, before the Fed sharply raised borrowing costs to curb high U.S. inflation.
“Anything above 7%, the market is dead,” said Mark Zandi, chief economist at Moody’s. “No one is going to buy.”
Mortgage rates need to get closer to 6% or lower to “revive the housing market,” he said.
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The financial analysis shows why: Consumers with a 30-year, $300,000 fixed mortgage at 5% would pay about $1,610 per month in principal and interest, according to a Bankrate analysis. They would pay about $1,996 — about $400 more per month — at 7%, it said.
Meanwhile, the Fed started cutting rates in September as inflation has fallen. The central bank cut its benchmark interest rate three times in that period, by a full percentage point.
Despite this Fed policy change, mortgage rates are unlikely to fall back to 6% until 2026, Zandi said. There are underlying forces that are “not going away anytime soon,” he said.
“It may well be that mortgage rates rise before they fall,” says Zandi.
Why have mortgage rates risen?
The first thing you need to know: Mortgage rates are more closely linked to returns US government bonds with a ten-year term than the Fed’s benchmark interest rate, said Baker, the founder of Claris Financial Advisors.
Treasury yields stood at about 4.6% on Tuesday, compared with about 3.6% in September.
Investors who buy and sell government bonds influence these returns. They appear to have risen in recent months as investors have grown concerned about the inflationary impact of President Donald Trump’s proposed policies, experts say.
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Policies such as tariffs and mass deportations of immigrants are expected to increase inflation if they become reality, experts say. The Fed could cut borrowing costs more slowly if that happens — and possibly raise them again, experts say.
Fed officials even recently cited “upside risks” to inflation due to the potential effects of changes in trade and immigration policies.
Investors are also concerned about how a major package of expected tax changes under the Trump administration could increase the federal deficit, Zandi said.
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There are also other factors that influence government bond yields.
For example, the Fed has reduced its holdings of government bonds and mortgage bonds through its quantitative tightening policy, while Chinese investors have ‘become more cautious’ in buying government bonds and Japanese investors are less interested because they can now get returns from their government bonds. their own bonds, Zandi said.
Mortgage rates “will likely not fall below 6% until 2026, assuming all goes as expected,” said Joe Seydl, senior market economist at JP Morgan Private Bank.
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Lenders typically price mortgages at a premium over 10-year government bond yields.
That premium, also called the “spread,” averaged about 1.7 percentage points between 1990 and 2019, Seydl said.
The current spread is about 2.4 percentage points – roughly 0.7 points higher than the historical average.
There are a few reasons for the higher spread: For example, market volatility has made lenders more conservative in their mortgage underwriting, and that conservatism was exacerbated by the 2023 “shock” in regional banks, which caused a “severe tightening of lending standards.” Seydl said.
“On balance, 2025 is likely to be another year in which housing affordability remains under severe pressure,” he said.
That higher premium “exacerbates the housing affordability challenge” for consumers, Seydl said.
The typical home buyer paid $406,100 for an existing home in November, up 5% from $387,800 a year earlier, according to the National Association of Realtors.
What can consumers do?
In today’s housing and mortgage market, financial advisor Baker suggests consumers ask themselves: Is buying a home the right financial move for me right now? Or will I be a renter instead, at least for the foreseeable future?
Those looking to buy a home should try to make a “significant” down payment to reduce the size of their mortgage and make it easier to fit into their monthly budget, Baker said.
Don’t subject savings for a down payment to the whims of the stock market, he said.
“That’s not something you should gamble on in the market,” he said.
Savers can still get a return of about 4% to 5% from, for example, a money market fund, a high-yield bank savings account or a certificate of deposit.
Some consumers may also want one adjustable rate mortgage instead of a fixed-rate mortgage — an approach that can get consumers a better mortgage rate now but saddle buyers with higher payments later due to fluctuating interest rates, Baker said.
“You’re taking a chance,” Baker said.
For example, he doesn’t recommend this approach for people on fixed incomes who are retired because they are unlikely to have room in their budgets to accommodate potentially higher monthly payments in the future, he said.