Mortgage Rates

Mortgage Rates

There is an expectation that mortgage rates will continue to drop over the next year. This is driven by a few factors and resisted by a few as well. One small factor is the expectation that the Federal Reserve will make a 1/4% rate cut before the end of the year. The Fed held rates steady at 3.5%-3.75% in their March meeting. The Fed changing rates 1/4% is not material and does not directly affect mortgage rates; however, the Fed does look at the overall economy and forces that would lower mortgage rates could also prompting them to lower the federal funds rate.

 

Perhaps the biggest resistance to lower mortgage rates is the ever present concern around inflation. We have seen inflation rates steadily drop over the past 4 years from highs over 9% to 2.4% for the first 2 months of 2026. The current influence on inflation is coming from oil and gas prices after the attacks on Iran and the limited supply flowing through the Strait of Hormuz. Before the Iran conflict/war, we saw concerns due to tariffs and other Trump policies. The current outlook for inflation for the year is 2.6%. This is still a good inflation rate compared to previous years, but higher than we saw for most of the past 20 years.

 

An interesting perspective on mortgage rates is that higher mortgage rates are a piece of the inflation calculation. Housing costs as a whole are approximately 25% of the inflation calculation. These housing costs include rents, mortgages, and taxes and insurance associated with housing. This correlation links mortgage rates to inflation and could be a double edged sword for better or worse.

If the Iran conflict gets resolved quickly in the next 2-3 months, then we should see oil and gas prices drop. This will help keep inflation low and signal stability to the housing market, which should encourage mortgage rates to drop a little further. Current forecasts expect the average mortgage rate to drop to under 6% (5.9%). But if the stars align, we could see mortgage rates lower than that for many home buyers.

 

If you are like me and have a mortgage rate between 2% and 3.5%, you are not excited about a 5.5% interest rate, but it is a noticeable improvement from the 7% rates we have seen in the past 2 years. If you have a low mortgage rate, you are motivated to stay in your current home and not move. Unfortunately, that is easier said than done if you have a job relocation or a life event that forces your hand.

 

Another consideration on home buying is the price of homes. The price increase has made owning a home less affordable than it was in the 1990s and 2000s. It was tougher in the 1980s when interest rates were in the double digits, but it is certainly not ideal now with the current interest rates and high home prices. This is especially true for first time buyers who have not benefited from the appreciation of a previous home.