What's New
The Federal Reserve lowered interest rates once again this week, and the move has many wondering how this will impact mortgage rates and the larger housing market.
Based on the Fed's new decision, interest rates are now reduced by a quarter percentage point, moving to a range of 4.25 and 4.5 percent. That is the same level interest rates were at in December 2022.
"Today was a closer call but we decided it was the right call," Fed chair Jerome Powell said.
Why It Matters
Rates have been falling consistently over the past year. Due to this, car loans and credit card interest rates have become more affordable for the average American.
However, the housing market has remained relatively stubborn, with the Fed's lowering interest rates not changing much for Americans unable to afford a home. According to Zillow, the average home price is $357,469 in America, leaving many priced out of real estate completely.
What To Know
The Fed originally went on an interest rate rising spree in an effort to curb inflation, which peaked at 9.1 percent in 2022.
The federal funds rate was raised by the Fed 11 times in 2022 and 2023 to curb high inflation, which hit both the United States and countries around the world after the COVID-19 pandemic. As inflation in the U.S. cooled, the Fed cut rates twice, once in September and once in November, before slicing them for a third time this year on Wednesday.
What Happened to Mortgage Rates Following the Fed's Most Recent Meeting?
While some believe the Fed's rate cuts will benefit the housing market, the Fed only controls short-term lending rates.
"Long-term rates, like mortgage rates, are influenced by supply and demand and external buyers of U.S. debt," Kevin Thompson, a finance expert and the founder and CEO of 9i Capital Group, told Newsweek.
What People Are Saying
Thompson told Newsweek: "With the 10-year Treasury yield climbing above 4.5 percent and nearing 5 percent, housing affordability will likely become even more challenging. I expect mortgage rates to remain between 6.5 percent and 7.5 percent indefinitely."
Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek: "Unless something dramatic happens, it's fair to say the jubilation over the housing market for 2025 was certainly a situation of putting the cart before the horse."
He added: "While interest rates were cut, and we can expect two more cuts next year, this is less than the four originally expected. The Fed's concerns of inflation still being higher than expected combined with a jump of treasury yields actually caused mortgage interest rates to jump in recent weeks, not go lower."
Melissa Cohn, the regional vice president of William Raveis Mortgage, told Newsweek: "This cut is already baked into the 10-year bond yields, and will not have any impact on mortgage rates. The cut will reduce the prime rate and home equity loans will move down by .25 percent as a result."
What Are Mortgage Rates Expected to Be in 2025?
Mortgage rates have fallen from the highs they reached in 2023, with the average 30-year fixed mortgage rate ranging from 6.5 and 7.5 percent over the last year.
Going into 2025, mortgage rates were expected to be in the mid-5 percent range but are now inching toward 7 percent.
Economists now anticipate that 30-year fixed mortgage rates will stay in the mid-6 percent range next year.
What Affects Mortgage Rates?
Several factors play a role in how high or low mortgage rates are. While inflation has an impact on a larger scale, your mortgage rate will also depend on your financial history and credit score.
The down payment amount and proven income of the homebuyers as well as the home's location and loan type can also jolt mortgage rates up or down.
What Happens Next
While there's some good news for homebuyers now, the Fed warned it would likely only lower interest rates twice more going into 2025.
"With today's action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive," Powell said at a news conference this week. "We can therefore be more cautious as we consider further adjustments to our policy rate."
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