With long-term mortgage costs rising within the past year, many potential homebuyers are cautious and curious as to what the next year will hold for the future of purchasing property.
Long-term mortgage costs have been on the rise since the Federal Reserve began cutting interest rates in September, and while falling interest rates typically mean lower mortgage costs, that’s not what’s been occurring in the US since the summer.
Simon Moore, a senior contributor for Forbes, wrote that “the yield curve has steepened. That has more than offset any benefit from lower short-term rates for mortgage costs. Short-term rates have come down as longer-term rates have risen.”
While some federal projections suggest that mortgage rates may decline, other factors are also at play. The rates will either increase or decrease based on expectations for the monetary policy and inflation rates throughout the country.
“After hitting lows of approximately 3% in 2020-2021, the 30-year mortgage has risen significantly since 2022, peaking at almost 8% in October 2023. It now stands at 6.8%. That rate is higher than the September low of just above 6%.”
Short and long-term interest rates are currently in separate places due to the federal government cutting rates in general. Short-term interest rates are currently .75% lower than what they were in August this year, according to Moore.
“In contrast, the 30-year mortgage rate is now 0.7% higher. This steepening of the yield curve and divergence of short- and long-term interest rates is not unusual, but is often associated with recessions, according to research from the Richmond Fed.”
The inverted yield curve that occurred from summer 2022 to summer 2024 is less common than a positively sloped curve, Moore stated.
“In fact, the yield curve could steepen further. The curve is effectively flat today but in recent decades, longer rates have peaked at 3% to 4% above short-term rates.”
“The good news, for those hoping for lower mortgage rates, is that a lot of that steepening could come from the Fed cutting interest rates further rather than mortgage rates moving higher.”
The CME FedWatch tool predicts that the Fedmay cut short-term interest rated to lower than 4% by December 2025.
“If the Fed sees unanticipated weakness in the U.S. economy and cuts rates more than expected, that could bring down mortgage costs. Conversely, if inflation were to resurge and the Fed raised rates, then mortgage costs could move higher. However, for now, there is some optimism that the U.S. will avoid both a recession and major further inflation,” Moore explained.
Fed policymakers predicted in September that short-term interest rates could move down to around 3% as time passes. If this prediction holds true, mortgage rates will lower, however, this is a long-term prediction, meaning only time will tell.
Eric Mastrota is a Contributing Editor at The National Digest based in New York. A graduate of SUNY New Paltz, he reports on world news, culture, and lifestyle. You can reach him at eric.mastrota@thenationaldigest.com.
