Many people who are looking to buy a home in the US are wondering if they will ever see mortgage rates as low as 3% again. After all, just a year ago, the average 30-year fixed-rate mortgage was around 3.1%, according to Freddie Mac. That was a historic low that made homeownership more affordable for millions of Americans.
But since then, mortgage rates have been steadily rising. Mortgage reached 7.83% on October 11, 2023. That’s the highest level since 2000, and it has a significant impact on the monthly payments and the total cost of borrowing for homebuyers.
Will Mortgage Rates Ever Be 3% Again?
So what are the chances that mortgage rates will drop back to 3% in the near future? Unfortunately, not very high, according to most experts.
The main reason why mortgage rates are so high right now is inflation. Inflation is the general increase in the prices of goods and services over time, and it reduces the purchasing power of money. When inflation is high, lenders demand higher interest rates to compensate for the loss of value of their money over time.
Inflation has been surging in the US since the start of the pandemic, due to several factors, such as supply chain disruptions, labor shortages, pent-up demand, and massive government stimulus. The Consumer Price Index (CPI), which measures the changes in the prices of a basket of consumer goods and services, rose by 6.2% in September 2023 from a year ago, the highest annual increase since 1990.
Fed’s Role in Mortgage Rates
The Federal Reserve, which is the central bank of the US, has the dual mandate of maintaining price stability and maximum employment. To fight inflation, the Fed can raise its key interest rate, known as the federal funds rate, which influences other short-term interest rates in the economy. By making borrowing more expensive, the Fed can slow down economic activity and reduce inflationary pressures.
The Fed has already signaled that it will start raising its interest rate in 2024, sooner than previously expected. The Fed also announced that it will begin tapering its bond-buying program, known as quantitative easing (QE), which has been injecting trillions of dollars into the financial system since March 2020 to support the economy during the pandemic. By reducing its bond purchases, the Fed will reduce the supply of money in the market and put upward pressure on long-term interest rates, such as mortgage rates.
Therefore, unless inflation slows down significantly in the coming months, it is unlikely that mortgage rates will fall back to 3% anytime soon. In fact, some experts predict that mortgage rates could reach 10% by 2025.
Expert Opinions
Lawrence Yun, chief economist at the National Association of Realtors (NAR), says that “returning to mortgage rates of 3% or 4% is not going to happen, in my view. He points out that historically rates have been higher than that, and that “the short-lived era of 3% interest rates for 30-year fixed mortgages is over.
Lisa Sturtevant, chief economist at Bright MLS, agrees that “there will be no return to the 3% rates we had during the pandemic“. She says that “while mortgage rates likely will come down some in the second half of the year, they will remain above 6% for most borrowers“.
Of course, no one can predict the future with certainty, and there are always factors that can affect mortgage rates in unexpected ways. For example, if there is a major geopolitical crisis or a new variant of COVID-19 that threatens global health and stability, investors may flock to safe-haven assets such as US Treasury bonds, which would lower their yields and consequently lower mortgage rates.
But barring any major shocks to the system, most analysts agree that mortgage rates are unlikely to return to 3% in the foreseeable future. Therefore, homebuyers who are waiting for a better deal may be disappointed and miss out on other opportunities in the housing market.
In summary, it is unlikely that mortgage rates in the US will ever reach 3% again, at least not in the foreseeable future. This is due to a combination of factors, including:
Higher Inflation: Inflation is currently at a 40-year high in the US, and the Federal Reserve is raising interest rates to combat it. This puts upward pressure on all borrowing costs, including mortgage rates.
Changed Economic Landscape: The global economy has changed significantly since the last time mortgage rates were at 3%, in 2020. There are now greater geopolitical tensions, supply chain disruptions, and a looming recession. These factors make it less likely that interest rates will fall back to such low levels.
Shifting Investor Expectations: Investors have become accustomed to higher interest rates and may not be willing to lend money at such low rates as they were in the past. This could keep mortgage rates above 3% even if inflation and other factors were to moderate.
However, it is important to remember that the future is uncertain. If inflation falls significantly and the economy enters a deep recession, it is possible that mortgage rates could fall back to 3%. However, this scenario is considered unlikely by most economists.