After two decades of stability, mortgage rates skyrocketed in 2022 and 2023 and have yet to recover fully. Mortgage rates rose when the Fed implemented consistent interest rate hikes to stifle inflation and hoped to lower rates once inflation had been tamed.
Despite three rate decreases at the end of 2024, mortgage rates rose consistently for four months, which is incongruous with how mortgages typically react to interest rate cuts.
Most economists and housing experts initially predicted mortgage rates to fall to 5% by the end of 2025, but now most forecasts don’t foresee rates declining to 6% before 2027.
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Renewed inflationary pressures and a new presidential administration have sparked uncertainty among buyers and investors.
We spoke with Tia Boatman-Patterson, former Housing Director at the White House Office of Management and Budget and current President and CEO of the California Community Reinvestment Corporation, to discuss housing market uncertainty and the future of mortgage rates.
Although she expects rates to fall from their current level, Boatman-Patterson has a bold prediction that home buyers may want to take note of.
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Former OMB official: Mortgage rates below 5% may be a relic of the past
One of the most direct – yet hardest to achieve — methods of stimulating the housing market is for mortgage rates to fall a few percentage points. The average fixed 30-year mortgage rate was 6.87% as of mid-February, a modest decline from the 7.79% peak in October 2023, but almost double the mortgage rates seen in 2022.
Though all buyers would prefer the lowest mortgage rate possible, Millennial and Gen Z consumers note that mortgage rates below 6% would make them comfortable buying a home this year. About a third of homebuyers of all ages say mortgage rates below 3% would make them comfortable buying in this market.
However, mortgage rates below 5% — and perhaps even below 6% — may become a rarity in the future.
Boatman-Paterson explains that the sub-5% mortgage rates that persisted over the past twenty years were an outlier and may not return anytime soon — or ever.
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“The unusually low mortgage interest rates that we’ve seen in recent years is just that: unusual,” she said. “They were around for so long that people think that’s how it’s supposed to be, but when folks bought houses in the 1980s and the 1990s, 11% or 12% mortgage rates were standard. We have a different perspective, but we should look at historical trends over a longer period of time. “
Though homebuyers may not see the COVID-era 2-3% mortgage rates again, rates of 5% or 6% may be more likely. However, even 5% may be a hopeful estimate.
“Frankly, I believe that the days of 2% or 3% mortgage rates are gone,” she continued. “So long as our financial institutions have high cash reserves and liquidity, and the cost of funds remains high, I don’t see those mortgage rates ever coming down to 2%, 3%, or even 4%.”
“Rates may come down to 6% or 5%, but I think even 5% is optimistic. A more reasonable mortgage rate probably hovers between 6 and 7% — I think that’s our new reality.”
Inflation and uncertainty are keeping mortgage rates elevated
Several factors shape mortgage rates, but the 10-year treasury yield and the federal funds rate are the most influential. However, inflation, investor sentiment, economic growth, and general uncertainty dictate how the treasury yield performs and how the Fed approaches interest rates.
The unprecedentedly low mortgage rates in 2020 and 2021 were a product of relatively low inflation and fears that COVID-19 would create a long, global recession.
The Fed kept interest rates at historically low levels – around 0.1% — to reduce recession risk, and low inflation paired with negligible interest rates created very competitive mortgage rates.
Related: Warren Buffett’s Berkshire Hathaway makes bold 2025 housing prediction
However, when inflation rates surged to 9.1% in 2022, the Fed began raising interest rates to curb inflation. Those high interest rates and relatively high inflation put upward pressure on mortgage rates and significantly raised housing costs.
“We’re still in that inflationary market where we’re still trying to temper inflation,” Boatman-Patterson explained. “If you’re still dealing with those monetary policies trying to regulate the economy and prevent inflation from running away, then you’re not going to see those low interest rates from a few years ago. There was recently a call for lowering interest rates, but if interest rates are lowered, what does that do to the overall economy?”
Though the Trump administration had previously clashed with Fed Chair Jerome Powell by urging the board to cut interest rates, it has now turned its attention to reducing the 10-year treasury yield, which mortgage rates are closely linked to.
“I do think the housing market is a little fluid now. The stock market is fluid, too — everyone is looking to see what this new administration will do,” she continued. “Tariffs and other policy changes would have some impact on the economy and monetary policy, so I think there’s a little bit of an unknown and a bit of disruption going on in the market now.”
Related: Veteran fund manager issues dire S&P 500 warning for 2025
