Inflation is dropping. Will mortgage rates fall, too?
If you've thought about buying a house in the past year, you probably know that mortgage rates have been high, especially when contrasted with the low rates that were available just a few years ago. Mortgage rates have increased for a variety of reasons, but the main driver has been the repeated federal funds rate hikes by the Federal Reserve, which were done in an attempt to fight inflation.
Inflation has cooled recently, though. And, new data shows that the rate of inflation year-over-year was 3.1% in November, a significant drop from the peak of over 9% in June 2022. With that in mind, you may be wondering if mortgage rates could drop soon, providing some relief to those looking to buy a home. Here's what you need to know.
Start comparing your mortgage loan options online now.
Inflation is dropping. Will mortgage rates fall, too?
While the inflation rate has not yet met the target rate of 2% set by the Fed, the new inflation data shows significant progress. And, there are other reasons to be optimistic if you're hoping to buy a home with a more reasonable mortgage moving forward.
Rates have already fallen
Mortgage rates have already declined in recent months. As of December 12, 2023, the average nationwide rate for a 30-year fixed-rate mortgage was 7.32%. The average rate on a 15-year fixed-rate mortgage was 6.74%. Those numbers rates were 8.06% and 7.20%, respectively, in early November.
Rates have fallen for several reasons, including the drop in inflation and a small uptick in unemployment. Inflation tapering off could lead to further drops. If the unemployment rate continues to increase, that could also lead to further mortgage rate declines.
Find out more about the mortgage rates you could qualify for here.
The Fed decisions will impact rates
The Fed increased the federal funds rate multiple times over the past 18 months to fight inflation. The Fed increases rates when inflation is high to discourage spending. This leads to less money flowing into the economy, which, in theory, lowers inflation.
The Fed is slated to meet again on December 13. While Powell has not ruled out raising rates even further, recent data suggests that a third straight meeting with no rate change could happen, which could cause mortgage interest rates to trickle down a bit more.
"It is important to remember that inflation is still above the target rate of 2% and the Federal Reserve has made it very clear of their focus on price stability and controlling inflation," says John Dustman, SVP and head of consumer lending and mortgage at Axos Bank. "This will likely lead to the Fed keeping rates higher for longer in 2024."
There may well be some rate cuts from the Fed in 2024 but are more likely to happen in the second half of the year. Once that happens, there will likely be further drops in mortgage rates.
Expectations should be realistic
Mortgage rates have already fallen and may well keep going down in the months ahead, but it's important to be realistic.
"Mortgage rates follow the 10-year treasury and that had backed off by about 0.75% since October," says Erik Nero, a financial advisor at First Step Wealth. "This may offer some relief to home buyers but they should not expect rates to be where they were a couple of years ago."
Even so, with rates ticking back down toward 7%, buying a home may be more feasible for many potential homeowners.
The bottom line
Inflation continues to cool and mortgage rates have gone down alongside it. With the most recent inflation report showing that trend continuing, mortgage rates should continue to dip as well — though they aren't likely to hit the low rates that were available a few years ago. That said, even slight rate decreases could make homebuying more accessible to many homeowners.
Joshua Rodriguez contributed to the reporting in this article.
