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Why are mortgage rates falling, and how long will they continue to decrease? Insights from experts
Mortgage rates are hitting their lowest level in over a year, as the Fed considers a rate cut next month.
Mortgage rates are falling, and since last October, when the rate tacked onto a 30-year home loan hit a record high of 7.79 percent, rates have come down to 6.47 percent. This average is still much higher than that seen over the last ten years as a result of the rate hikes imposed by the Federal Reserve beginning in 2022.
As for why mortgage rates are now falling, the Fed has indicated that it is prepared to begin cutting rates, and could do so as early as next month. News from the Fed that rates will fall allow investors to reduce their risk outlook and begin offering lower rates. Why are mortgage rates now falling? The Fed has indicated that it is prepared to begin cutting rates and could do so as early as next month.
The Federal National Mortgage Association, more commonly referred to as Fannie Mae, has released their economic forecasts for the third quarter of 2024 and estimates that the 30-year rate will fall from 6.9 percent recorded in quarter two to 6.3 percent. However, for most homebuyers, rates at these levels still leave them priced out of the market.
“The slight decline in mortgage rates of late, following data pointing to gradually slowing economic growth, has not been enough to overcome the significant affordability constraints imposed on would-be homebuyers.”
Doug Duncan, the Chief Economist at Fannie Mae, explains that reduced demand in the housing market means that even as the number of houses on the market rises, “actual home sales have not picked up.”
Freddie Mac, the Federal Home Loan Mortgage Corporation estimates that in 2025, rates on 30-year home loans will fall to an average under 6.5 percent. The forecast, which was released in mid-July, does not factor a rate cut for September, but does “anticipate a rate cut towards the end of this year if the job market cools off enough to keep inflation in check.”
“This rate cut, if it occurs, could lead to a slight easing of mortgage rates in 2024, offering a glimmer of hope for prospective buyers,” aruges Freddie Mac. However, for those who will see their jobs lost as unemployment continues to tick up, their dream of owning a home will fall farther out of reach.
What led the Fed to increase interest rates?
The Fed has yet to begin decreasing rates, and many suspect a small cut could be coming in September. The post-Kenysian economist James K. Galbraith wrote in Project Syndicate that the rate hikes imposed by the Fed were finally catching up with the US economy and that the stock market “crash” in early August is evidence of his argument. However, the investor selloff that took place on Monday has been chalked up to a set of factors, one of which being high interest rates, another the overvaluing of stocks based on the promise of AI, which still needs time to generate profits worthy of the investment that it had seen over the last year. Those profits will surely come, particularly if AI remains unregulated by policymakers, but the technology still needs to advance. But, Galbraith puts forward another hypothesis about the Fed’s behavior based on a study he co-authored in 2007. The Fed’s move to increase rates should not be seen as a response to inflation but to low unemployment and concerns that workers could soon demand higher wages as the reserve army of the unemployed dried up as more workers were integrated into the labor market. When workers face little competition, they are in a better position to demand better pay and conditions. Galbraith explains that the study found that “after 1984, the Fed ceased reacting to inflation” and “instead [...] would raise short-term interest rates in response to a low or falling unemployment rate.”