The Fed May Have Just Slammed the Brakes on Mortgage Rates’ Steep Climb

The run-up in mortgage rates might be coming to an end.

The U.S. Federal Reserve voted on Wednesday to hold its short-term interest rates steady—but it left open the possibility of another future rate hike. That is likely to take the pressure off of mortgage interest rates for now, and slow down or halt their relentless climb. Mortgage rates are separate from the Fed’s rate, but they often move in the same direction.

“My expectation is a gradual slowdown in mortgage rates,” says Realtor.com® Chief Economist Danielle Hale. “We’ll see mortgage rates hover in this upper 7% range and by the end of the year could head back toward 7.5%.”

The Fed has been raising rates to combat inflation by making borrowing money more expensive. Rates are currently at a 22-year high. Inflation has come down thanks to the Fed’s rate hikes from a peak of 9.1% in June of last year to 3.7% in September. However, the central bank isn’t likely to begin cutting rates, which is expected to result in lower mortgage rates, until inflation is firmly within its target of 2%.

“The Fed has been pretty clear and consistent that rates are going to need to be higher for longer until inflation is under control,” says Hale.

In addition, the central bank could vote to continue raising rates later this year or next.

“We haven’t made any decisions about future meetings,” Fed Chair Jerome Powell said in a press conference on Wednesday.

Higher mortgage rates have effectively frozen the housing market. Homeowners are reluctant to give up the sub-3% rates they locked in during the COVID-19 pandemic, so they’re staying put instead of trading up or down into new homes. That’s worsening the housing shortage.

Buyers are struggling to afford today’s high home prices at a nearly 8% mortgage rate. Many have dropped out of the market or are waiting for rates to come down.

The typical monthly mortgage payment was about 90% more than it was just two years ago, according to a Realtor.com analysis. (The calculation looked at median home list prices on Realtor.com in September 2021 compared with September 2023 and average mortgage rates on Nov. 1, 2021, compared with Nov. 1, 2023, on Mortgage News Daily. Property taxes, insurance costs, and homeowners association fees were not included.)

“After picking up somewhat over the summer, activity in the housing sector has flattened out,” Powell said. “It remains well below levels of a year ago, largely reflecting higher mortgage rates.”

The good news for homebuyers is rates, which topped 8% briefly last month, appear to be coming down a bit, according to Mortgage News Daily data. They had dipped to 7.75% as of early Wednesday afternoon. The publication looked at average, daily rates for 30-year fixed-rate loans.

“For now, things seem to be moving in a more friendly direction for homeowners,” says Hale.

However, real estate experts are often the first to acknowledge they have been wrong before. In September, the Fed didn’t raise rates, and yet mortgage rates shot up in the following days.

“Rates don’t always move in ways that make sense,” says Hale. “Rates can surprise you.”

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