When will mortgage interest rates drop? 3 factors are influencing rates now

News on the economic front has been mixed in recent weeks. While the unemployment rate has continued to improve after falling to 3.6% in June, inflation and interest rates remain high. The current economic climate has made it difficult for Americans looking to buy a home or refinance their existing mortgage.

The drop in mortgage rates will be welcome news to anyone looking to buy a home Refinance their mortgage, but when will that be? We asked some experts what’s affecting rates now and when mortgage interest rates will finally drop.

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3 Factors Affecting Mortgage Rates Today

What experts say is affecting mortgage rates today — and when buyers and owners can expect them to drop again.

1. Inflation

No surprise here. All the experts we spoke with agreed that inflation, along with the Federal Reserve’s efforts to control it, remains a primary contributing factor today. High mortgage rates. According to Freddie Mac, mortgage rates are at their highest level since November 2022 The average rate for a 30-year fixed-rate mortgage as of mid-July 2023 is 6.96%.

Greg Forrest, a senior global real estate advisor at Sotheby’s International Realty, is one of the experts attributing higher mortgage rates to the Fed’s impact. “Inflation and the Federal Reserve’s response play a significant role in today’s high rates,” Forrest says. “The Federal Reserve has reacted quickly to inflation concerns by implementing historic rate hikes. In my opinion, a very rapid increase has led to a significant increase.”

Forest rates are increasing before decreasing. “I believe we’ll see the pace of inflation continue to weigh heavily on rates. I expect mortgage rates to remain modestly elevated through the end of this year. [or] At the beginning of 2024, that’s when I expect them to start declining.”

Aaron Vantrogen, CEO of Geneva Financial, agrees that mortgage rates likely won’t fall for some time because long-term rates (mortgage rates) follow short-term rates (the fed funds rate), which remain higher. “They’ve been saying this for a while and doing exactly that; steep interest rate hikes,” Vantrogen said.

“There’s no reason to believe today that they’re not going to follow through on what they’ve been saying for some time. The Fed doesn’t expect monetary easing until 2024.”

2. Prepayment Risk

While Polunsky Bittel Green senior associate Peter Idziak points to inflation as the primary driver of higher mortgage rates, he notes that it’s not the only factor: “The other major factor driving rates is that investors expect rates to drop in the coming years,” Idziak said. “The mortgages they are buying today are likely to be paid off earlier than the historical average. To compensate investors for this prepayment risk, mortgage rates have had to move further.”

So when will mortgage interest rates drop? “I expect we’ll start to see rates come down after 2023,” Idziak said. “The Fed has previously indicated it will only raise rates two to three more times, and June’s CPI inflation data was cooler than expected, so we should be nearing the end of the Fed’s rate-hiking campaign.”

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3. Treasury yields

usually, Bail rate Tendency to follow the 10-year Treasury rate. The 30-year fixed mortgage rate remains 1.7 percentage points (equivalent to 170 basis points) higher than the 10-year Treasury bond yield. However, spillovers can occur amid economic or geopolitical uncertainty, such as today.

Christine Cooper, chief U.S. economist and managing director of CoStar Group, notes the spread to more than 280 in 2023. As a result, “mortgage rates are higher than in a calmer economic environment. A combination of factors drives this spread, including lenders’ perception of default risk and demand in the MBS market,” Cooper said.

Because the Fed is likely to raise rates at least one more time this year, Cooper expects mortgage rates to remain high in the short term before we see a drop. “As economic growth slows and inflation declines, the 10-year Treasury could go lower, and mortgage rates will follow, narrowing the spread between them to a more normal range,” Cooper said. “Projections suggest the 30-year rate will fall below 6% by the end of 2023 and between 5% and 5.5% by the end of 2024.”

Bottom line

If you are waiting Mortgage rates drop Before buying or refinancing a home, there are still steps you can take to improve your financial situation. For example, repairs or home improvements can increase the value of your home and allow you to fetch a higher price when you decide to sell. A Home equity loan or Home equity line of credit Those who can help finance the project.

This is a good idea Take steps to improve your credit Before you refinance your home. Having a credit score that falls in the good or excellent credit range can improve your chances of loan approval and secure favorable rates.