When will mortgage rates fall? Three economists weigh in.

By Aarthi Swaminathan

The 30-year mortgage crossed above 7% on Monday, according to Mortgage News Daily

Waiting for mortgage rates to fall before buying a house? You may be in for a long wait.

U.S. mortgage rates inched up slightly on the back of the strong jobs report, as the market expects the Federal Reserve to postpone cutting interest rates. The 30-year mortgage edged up 10 basis points on Monday afternoon to 7.11% according to Mortgage News Daily, which surveys lenders.

For many home buyers, higher rates limit how much house they can afford. Higher housing costs have even pushed some to make sacrifices such as skipping meals and working overtime, according to one survey of 3,000 people by real-estate brokerage Redfin (RDFN).

So when will mortgage rates fall? MarketWatch asked three economists focused on housing. Here's what they said.

'It would take a painful economic event for mortgage rates to fall significantly.' Orphe Divounguy, senior economist at Zillow

A return to the pre-pandemic level of 4% for the 30-year mortgage is far off, Orphe Divounguy, senior economist at Zillow (ZG), told MarketWatch.

"It would take a painful economic event for mortgage rates to fall significantly," he explained. "A surprise downturn in economic activity, a sustained drop in consumer prices, a sharp rise in the unemployment rate, basically a prolonged recession is what it would take."

Even though the Federal Reserve is expected to cut interest rates this year, which would pressure mortgage rates down, that won't be enough, the economist stressed.

"Current mortgage rates already reflect the market's expectation that the Fed will cut its policy rate two or three times in 2024," he added.

Divounguy even penned a LinkedIn post dedicated to the question at hand, and concluded: "I wouldn't hold my breath waiting for a drop in mortgage rates."

'Falling inflation is the piece of the puzzle that needs to be in place before mortgage rates will fall in a more lasting way.' Danielle Hale, chief economist, Realtor.com

Until the Fed feels that it has consumer prices under control, don't expect much from mortgage rates, Danielle Hale, chief economist at Realtor.com, told MarketWatch.

Realtor.com is operated by News Corp subsidiary Move Inc. MarketWatch publisher Dow Jones is also a subsidiary of News Corp.

"In order for rates to decline meaningfully and sustainably, inflation needs to be convincingly on a path to the Fed's 2% target," Hale explained.

Economic indicators from last week were a "mixed bag," the economist said, with some components moving in opposite directions. All eyes are now on the upcoming inflation data, which the consumer price index will reveal on Wednesday.

"Wednesday's Consumer Price Index data will shed light on whether inflation has cooled, falling back in line with trends seen last summer and fall, or continues the 2024 pattern of monthly price growth above the ideal band," Hale said.

Ultimately, "inflation is the primary focus for investors and the Fed. Falling inflation is the piece of the puzzle that needs to be in place before mortgage rates will fall in a more lasting way," she added.

'The labor market is no longer overheated to the degree we need to worry about inflation spiraling out of control, but it is nowhere near a recession ... [so] whether we get that first cut in June depends on inflation data.' Chen Zhao, economics research lead, Redfin

At the same time, the Fed is also trapped in a way by the election cycle, so expect cuts sooner rather than later, Chen Zhao, economics research lead at Redfin, told MarketWatch.

"The labor market is no longer overheated to the degree we need to worry about inflation spiraling out of control, but it is nowhere near a recession. That means there is less reason to hurry up and cut," Zhao said in a blog post published by Redfin.

Yet "Fed Chairman Jerome Powell is likely eager to start cuts well before the election to avoid muddying the political waters," she added.

So "whether we get that first cut in June depends on inflation data," Zhao said.

Lower rates may not directly make it more affordable to buy a house

For many aspiring homeowners, the outlook for rates will come as bad news as higher interest costs reduce how much they can afford. If the 30-year mortgage rate increases from 6.9% to 7%, that's $27 more per month on a $400,000 mortgage, which can add up to $9,720 over a 30-year period.

The median sale price of a home as of March 31 was $376,223 according to Redfin. That's up nearly 5% from the same period last year. If a buyer takes on a 30-year mortgage with a rate of 6.79%, that translates to a $2,700 monthly payment.

On the other hand, lower rates also push up demand as more people buy, which then increases home prices, according to economists at the Dallas Fed.

Meanwhile, many homeowners and renters have already adjusted their lifestyles, cutting back on expenses, to manage the increase in housing costs.

In the same Redfin survey where people said they were skipping meals to afford housing, a fifth also said they were working additional hours or shifts at their job and selling their belongings to afford their rent or mortgage payment.

The real-estate industry, through groups such as the Mortgage Bankers Association, have pushed for the Fed to cut rates in a bid to make buying homes more affordable.

The mortgage industry in particular is losing money due to buyers holding back, as well as homeowners holding off refinancing their mortgages: With mortgage rates at this level, independent mortgage brokers lose $2,109 on each loan that originate, the group said, as of the fourth quarter of 2023.

How have home prices and mortgage rates affected your life and your financial decisions? We want to hear from readers who have stories to share about the effects of increasing costs and a changing economy. If you'd like to share your experience, write to readerstories@marketwatch.com. A reporter may be in touch.

-Aarthi Swaminathan

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04-09-24 1032ET

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