After some weak economic data, as well as clear signs that inflation continues to slow, expectations of falling interest rates have soared. As a result, mortgage rates rapidly plunged to their lowest level in 15 months.
According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage has fallen to 6.47%, a steep decline from 6.73% a week ago and the 2024 high of 7.22%. Rates on 15-year mortgages fell significantly as well.
This is certainly welcome news to prospective home buyers, as well as people who bought homes in recent years at elevated interest rates, since refinancing might be a viable option to lower housing costs.
However, there's reason to believe the bulk of the decline in mortgage rates could be yet to come.
Fed rate cuts are coming
To be perfectly clear, there's no guarantee that the Federal Reserve will cut the federal funds rate by a certain amount by the end of 2025 -- or at all. But the signs are pointing in that direction. Several Federal Reserve members have indicated that rate cuts are coming in the near future, and many experts are projecting several rate cuts in the coming year.
According to the CME FedWatch tool, financial markets are pricing in a 100% chance of a rate cut in September, and a greater than 50% chance that the Fed will make a "double," or 50-basis-point (0.50%) rate cut.
By the end of 2024, the median expectation calls for a full percentage point of rate cuts on the federal funds rate, and by September 2025 (the latest Fed meeting tracked by the tool), the expectation is for the benchmark interest rate to be 2 full percentage points lower than it is today.
What would this mean for mortgage rates?
There are a lot of moving parts for determining mortgage rates. The prevailing interest rate environment is a big one, but it's important to realize that it isn't a direct relationship. In other words, if the Fed lowers benchmark rates by 2 percentage points, I wouldn't expect the average 30-year mortgage rate to fall from 6.47% to 4.47%, although I would expect a significant move lower.
There are other factors that can influence mortgage rates as well. The macroeconomic environment, overall mortgage demand, and expectations for longer-term interest rates are a few examples.
Having said that, here are a couple of industry projections:
- Fannie Mae recently predicted that the average 30-year mortgage rate will fall to 6.2% by the end of 2025.
- In June, the Mortgage Bankers Association projected that the year-end 2025 average rate on the 30-year fixed mortgage will be 5.9%.
However, both of these predictions were made before the latest economic data was released and pushed the average 30-year rate down sharply. But with the current Fed expectations in mind, I'm going to make a bold prediction: The average 30-year mortgage rate in the United States at the end of 2025 will be 5%.
What would this mean for buyers and sellers?
Now, I don't have a crystal ball, and I don't think the 3% and 4% mortgage rates we saw a few years ago will make a comeback anytime soon. But if I'm right and rates hit 5%, the average principal and interest payment on a $400,000 mortgage would be about $373 per month less than it is today.
That would make a big difference in home affordability for millions of people looking to get a mortgage. It would also make it more financially practical for people with low mortgage rates to sell their homes, thereby invigorating the slow U.S. housing market.
