With average weekly mortgage rates near 7%, many potential homebuyers are sitting on the sidelines waiting — and hoping — for rates to come down in the near future. You might be one of them, thinking that if you just hold out a bit longer that 30-year mortgage will be more affordable.
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Unfortunately, there’s good reason — a lot of them, actually — to think that’s not going to happen. Of course, it might help to remember that, historically, today’s mortgage rates are not crazy high. They just feel that way because a mere four and five years ago they were less than half what they are now. But anyone who remembers the early 1980s, when rates hit an unimaginable 16.64%, will tell you 7% isn’t too bad.
Still, lower is better, so let’s explore the reasons better mortgage rates might not be on the horizon anytime soon.
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The Fed
It’s no secret that President Donald Trump and Federal Reserve Chair Jerome Powell have been at odds over the past several months. Trump wants the Fed to lower interest rates. And while it’s true that this might have the effect of lowering mortgage rates, it’s not a guarantee.
In fact, the Fed has no direct effect on mortgage rates, only an indirect one through influencing investor expectations, said Patricia Watson, a professor in the Dr. Wallace E. Boston School of Business at American Public University who focuses on real estate.
And as of June 16, CME Group’s FedWatch gave the chances of the Fed keeping rates the same in this week’s meeting at 99.08%. Not great odds for homebuyers.
The 10-Year U.S. Treasury Note
If you want to see where interest rates might be heading, a better place to check is the 10-year U.S. Treasury Note, said Watson. This is considered a standard for the 30-year fixed-rate mortgage.
“When the yield on the 10-year Treasury note rises, mortgage rates usually follow. In July 2020, the yield for this bond was just under one percent. Now it’s just under 4.5 percent, a large increase,” Watson said.
So mortgage rates are higher too.
Moody’s Downgrading
In May, Moody’s Ratings downgraded the US ratings from Aaa to Aa1. This might not sound like a big deal, but it is. At least in global financial markets and, therefore, in mortgage rates, said Watson. This ties back to the Treasury Notes. Because this signals to the world that lending to the U.S. government — through those Treasury Notes — is considered a bit riskier, investors want higher yields. That drives up the 10-year Treasury Note rate and keeps mortgage rates high, explained Watson.
Tariffs and Inflation
These all feed into an uncertainty about the future of the American economy, and that can keep mortgage rates unchanged, Watson said. For instance, one of the ways the Fed combats inflation is through raising interest rates, making borrowing more expensive and therefore, cooling major purchases. This lowers spending, demand and, ideally, slows inflation. But if inflationary policies, such as tariffs, are implemented, the Fed becomes hesitant to lower rates, especially since lowering rates can itself be inflationary.
The Bottom Line
In a time of economic uncertainty, one thing is certain, said Watson: Don’t expect mortgage rates to be as low as they were in 2020 to 2022 for a very long time, if ever in our lifetime. But it’s equally true that, while home prices might fluctuate some in the short-term, they go up in the long-term.
So, while you might need to more carefully weigh whether you can afford a home, it’s still considered by most to be one of the best wealth-building investments you can make.
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This article originally appeared on GOBankingRates.com: Waiting for Mortgage Rates To Drop? That’s Just Wishful Thinking
