Mortgage Predictions: With Fed Cuts on Hold, Where Do Rates Go From Here?

CNET

3 days ago

Buyers should keep an eye on the possibility of rate cuts in the next few months.
Tharon Green/CNET
The average rate for a 30-year fixed mortgage seems poised to hold near 6.75% for the rest of the year.
Yet significant economic uncertainties could still push rates up or down in the coming months. Housing market experts consistently point to two major influences: the economic ramifications of the Trump administration's policies and the Federal Reserve's pace of interest rate cuts.
On July 29-30, the Fed plans to keep borrowing rates the same at its fifth monetary policy meeting this year. Though markets currently expect a Fed cut in September, that's not a guarantee given ongoing political and economic instability.
"Even a September move may require more definitive evidence that the economy is cooling," said Odeta Kushi, deputy chief economist at First American Financial Corporation. "For the housing market, it means the rate-cutting cycle many were hoping would ignite the 2025 homebuying season is still on hold."
Although the central bank doesn't directly dictate mortgage rates, its policy decisions indirectly influence consumer borrowing costs, including for mortgages, over the long term. Mortgage rates, which are primarily tied to 10-year Treasury yields in the bond market, are also sensitive to other factors, including investor sentiment.
Ultimately, it's unlikely that mortgage rates will shift significantly outside the 6.5% to 7% range unless the economy slows significantly or unemployment increases sharply.
The problems afflicting the housing market will take time to solve. Apart from steep mortgage rates, high home prices and limited inventory have all but barred buyers from purchasing and owners from refinancing or selling.
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How are tariffs affecting the Fed and mortgage rates?
Following signs of slowing inflation in late 2024, the Fed implemented three interest rate cuts but has since adopted a more cautious wait-and-see approach this year. Policymakers have held interest rates steady amid market fluctuations, a stance it's expected to uphold at its Federal Open Market Committee meeting next week
Today's complex economic picture presents a challenge for the Fed, which is tasked with maintaining maximum employment and containing inflation. The president has claimed that prices are low and the Fed should cut rates immediately. But tariffs, which are taxes on imported goods, are widely expected to drive up prices.
We're already starting to see the effects: In June, inflation ticked up to 2.7%. While lower than markets expected, price growth is still well above the Fed's annual target rate of 2%.
As a result, experts say the central bank has good reason to keep rate cuts on pause.
"Increased uncertainty about the inflation picture lessens the chances of a cut in rates by the Fed," said Keith Gumbinger, vice president at HSH.com. "Greater inflation would argue against cutting rates, absent any significant deterioration in labor conditions."
Fewer interest rate cuts combined with the recently passed budget bill, which is expected to significantly boost government debt deficits, are likely to keep upward pressure on longer-term bond yields and mortgage rates. But Kushi notes that "any changes, delays or confirmations around tariffs could swing investor sentiment and move yields."
What would cause mortgage rates to fall?
While most forecasts have average 30-year fixed mortgage rates holding above 6.5% through the end of the year, that could always change.
The most recent jobs report appeared steady on the surface, yet several underlying indicators, including a rise in jobless claims, point to a weakening labor market.
"Small businesses, which are often more vulnerable to shifts in trade policy and borrowing costs, are also dialing back hiring plans amid tariff concerns," Kushi said.
If these trends eventually translate into higher unemployment, it would likely prompt the central bank to reduce borrowing costs. A weaker labor market would also drive bond yields and mortgage rates down. But if cheaper mortgages come as a result of an economic downturn, with households facing job losses, tighter budgets and financial instability, it could also keep buyers locked out
What's happening in today's housing market?
Affordability challenges have kept the housing market frozen for several years. Even as the long-standing housing shortage eases in several local markets and gives those buyers improved negotiating power, the rest remain locked out by steep home prices.
Home sales fell to a nine-month low in June as the national median existing-home price jumped to a new high of $435,300.
Plus, with recession risks still on the horizon, people who are nervous about finances will be more reluctant to take on mortgage loan debt. Prospective buyers waiting for mortgage rates to drop may soon have to adjust to the "higher for longer" rate environment.
While market forces are out of your control, there are ways to make buying a home slightly more affordable. Last year, nearly half of all homebuyers secured a mortgage rate below 5%, according to Zillow.
Here are some proven strategies that can help you save up to 1.5% on your mortgage rate.
💰 Build your credit score. Your credit score will help determine whether you qualify for a mortgage and at what interest rate. A credit score of 740 or higher will help you qualify for a lower rate.
💰 Save for a bigger down payment. A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.
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