Prospective home buyers who thought the Federal Reserve’s rate-cutting cycle would relieve high mortgage rates were in for a rude awakening in 2024. Since the date of the Fed’s first cut in September, the rate on a 30-year fixed mortgage has gone up nearly a full percentage point, even though the Fed has cut two more times since then.
The average 30-year fixed mortgage rate started 2025 at 6.91%, up from 6.09% when the Fed first cut in September, according to Freddie Mac.
“People have been saying, ‘Look, I’ll wait until the Fed cuts interest rates and then I’ll get a better mortgage rate. And we’ve seen exactly the opposite,” Bright MLS Chief Economist Lisa Sturtevant told Straight Arrow News.
Sturtevant said a key reason for this phenomenon is the mortgage market is reacting to expectations as opposed to actions.
“Mortgage rates had been following from the beginning of July all the way through the rate cut in September – the Fed had been telegraphing that they were going to do that rate cut in September – so it was already baked in,” she explained.
I think we are in a new normal where the mid-sixes is going to be a good mortgage rate.
Lisa Sturtevant, Bright MLS Chief Economist
But although the Fed would proceed to cut rates two more times before the end of the year, the committee signaled in December that they were less optimistic about the inflation track in 2025. They downgraded their forecast from four cuts in 2025 to just two.
“So mortgage rates rose on account of that information, as opposed to the rate cut itself,” Sturtevant said.
While many homeowners jumped on the opportunity to lock in a rate of around 6% in September, many more missed the boat. Sturtevant said those homeowner hopefuls will be ready to act quickly with any downward movement. But will rates only rise from here?
“I don’t think we’re going to get to 8% for sure,” Sturtevant said, responding to reports warning of that possibility. “I think we are in a new normal where the mid-sixes is going to be a good mortgage rate. And for some people, that’s hard to swallow, since during the pandemic, we saw rates down around 3%.
“But actually, over the last 50 years, the average rate on a 30-year fixed has been about 7.5%,” she continued. “So we’re not high by historical standards. We’re just high by what people had come to expect during the pandemic.”
The average 30-year fixed mortgage rate bottomed out at around 2.65% in January 2021. The post-pandemic peak hit 7.79% in October 2023.
Mortgage rates are more closely tied to the 10-year Treasury, which is a more reliable indicator to consider when predicting where mortgage rates are heading.
“We spent a lot of time wringing our hands and thinking about what the Federal Reserve is going to do, but the Fed is reacting to economic data, and that is what we should be looking at when we want to think about where mortgage rates are headed,” Sturtevant said.
Sturtevant recommended paying attention to the 10-year Treasury, inflation, the labor market and consumer confidence.
