Why mortgage rates are doomed to stay above 7% for the foreseeable future

• Housing experts were betting on mortgage rates to decline this year on looser Fed policy.

• Yet, the 30-year mortgage rate has been stuck around 7% all year.

• Freddie Mac and Fannie Mae say they expect mortgages to stay in the 7% range through 2024.

Interest rate forecasts have been volatile through 2024, as early bets for a policy pivot have consistently been let down.

With the Federal Reserve looking unlikely to ease rates before September, housing market analysts are recalibrating mortgage rate outlooks, as home loan rates are heavily influenced by the Fed funds rate.

Following the excitement of waning inflation at the end of 2023, which prompted calls for as many as seven Fed rate cuts in 2024, a string of discouraging consumer price index reports in the first quarter has prompted a shift.

The Fed has grown more cautious since the start of the year. Public remarks from central bankers in recent weeks have signaled no rush to loosen policy, and some market commentators have said they’re even eyeing another rate hike before a dovish pivot.

That’s complicated the outlook for all kinds of borrowing costs for consumers and businesses, and notably, it has made the outlook for mortgage rates much less rosy for potential buyers this year.

Government-sponsored mortgage finance giants Fannie Mae and Freddi Mac have pushed their forecasts for mortgage rates back up.

In a report this month, Fannie estimated that the 30-year mortgage could creep up to 7.1% in the coming quarters, before easing slightly by the end of the year. That’s well above the 6.4% forecast it held in April.

Freddie Mac has also adjusted its prediction.

“Our baseline scenario has one Federal Reserve rate cut towards the end of the year. As a result, we expect mortgage rates to remain elevated through most of 2024,” the government-sponsored enterprise wrote in its midyear outlook.

“The question our economics team is asked most frequently by industry participants remains where we think mortgage rates are headed,” chief economist Doug Duncan said in the report. “For now, we see rates remaining closer to 7 percent through the end of the year – before trending downward in 2025 – but note potential downside to that forecast given recent actual movements in rates.”

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High rates have added to a number of market burdens for both buyers and sellers, and consumers have largely stuck to the sidelines as a result. While there are some encouraging signs for prospective buyers, such as more inventory and less price appreciation, the market is still tight.

Many homeowners originally bought their property when mortgage rates were as low as 3%, and the steep rise since has disincentivized selling. According to Freddie Mac, six out of 10 mortgages have a rate below 4%, locking those owners into their lower costs.

With fewer existing homes on the market, a dearth of housing supply has caused prices to soar in the last 18 months.

“Move-up buyers feel stuck because they’re ready for their next house, but it just doesn’t make financial sense to sell with current interest rates so high,” Redfin Premier agent Sam Brinton said in a recent report.

Home prices hit a fresh record this month, reaching $387,600 in the four weeks through May 19, Redfin said. Between that and mortgage rate highs, median monthly housing payments are sitting just $20 below recent all-time highs.

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