For Americans hoping to purchase a home in the near future, the outlook is not promising. After mortgage rates spiked close to 8% late last year, they briefly dropped to around 6% in September. However, rates have been rising steadily ever since. This week, the average rate for a 30-year fixed mortgage reached 6.84%, marking the seventh increase in the past eight weeks, according to Freddie Mac.
Economists are predicting that mortgage rates will remain above 6% for at least the next two years. Lawrence Yun, Chief Economist at the National Association of Realtors, explained that a “new normal” around 6% is expected, and that rates of 3%, 4%, or 5% are unlikely to return anytime soon. For many prospective homeowners, this means borrowing will stay expensive, potentially pushing them out of the housing market.
Wells Fargo economists forecast that mortgage rates will average 6.3% by the end of next year, staying near that level through 2026. Similarly, Fannie Mae has raised its projections, predicting mortgage rates to average 6.4% in 2025 and 6.1% by 2026.
These higher mortgage rates are already contributing to a slowdown in the housing market. Home sales are on track to hit their lowest levels since 1995, as high mortgage rates and rising home prices have created barriers for many buyers. According to the National Association of Realtors, home prices have continued to climb for over a year, and despite the brief dip in borrowing costs earlier this year, there hasn’t been a major increase in home-buying activity.
Several factors may prevent mortgage rates from dropping in the coming years. Proposed policies under President-elect Donald Trump could spark inflation, which would likely keep the Federal Reserve from reducing interest rates. In fact, inflationary pressures could even lead to higher rates. Trump’s tax cuts and plans for increased government spending could add to the national debt, pushing Treasury yields higher. Since mortgage rates often follow Treasury yields, this could result in even more expensive borrowing costs.
The combination of these factors suggests that mortgage rates will stay high. Strong economic data, such as solid job growth and strong consumer spending, has already caused bond yields to rise. Inflation data has also been hotter than expected, which may prevent the Federal Reserve from cutting rates as soon as hoped.
The bond market is particularly sensitive to inflation, and economists are concerned that policies like tariffs, which could be part of Trump’s agenda, could drive prices higher. Billionaire investor Paul Tudor Jones has warned that a growing national debt could be problematic for the bond market, pushing yields—and, by extension, mortgage rates—higher.
However, there are some positive signs in the housing market. Employment remains strong, and wages are rising, which could make it easier for some buyers to manage higher mortgage rates. Additionally, more homes are becoming available for sale as more homeowners, who locked in low mortgage rates during the pandemic, decide to sell due to life events like marriage, divorce, or the need for more space.
Despite these positive developments, Lawrence Yun believes that the new normal of higher rates is something consumers are learning to accept. As more people adjust to the reality of 6% or 7% mortgage rates, increased inventory, job growth, and new household formations could help boost home sales. However, for many prospective buyers, higher mortgage rates may remain a significant challenge for the foreseeable future.
