Why Mortgage Rates Likely Won't Fall in 2025

Continued Job Creation, Higher Inflation, Higher Federal Deficits

I've got bad news: mortgage rates are not coming down. Despite some headlines hinting at economic relief, the reality is more complex, and it’s essential to understand what’s really driving these trends. If you’re in your 30s or 40s and considering a move, upgrade, or refinance, it might be time to take a step back and examine the bigger picture.

Charts: The Housing Market and Interest Rates. January 2025

A Federal Reserve Pivot Doesn't Mean Relief for Mortgages

Over the past year, the Federal Reserve has started to lower interest rates after dramatically increasing them to fight inflation. Since September 2024, the Fed has reduced rates by over 1%. Yet, 30-year fixed mortgage rates remain stubbornly high. Why?

The answer lies in the broader economic environment. The U.S. economy continues to churn out jobs, with recent reports exceeding expectations. While this is good news for workers, it’s a signal to lenders and investors that the economy remains robust — which in turn pressures long-term rates higher. Mortgage rates, tied closely to the 10-year Treasury yield, reflect this dynamic. And over the last 12 months, those yields have been rising steadily.

Historical Perspective: The Shocking Reality of Long-Term Rates

To truly understand today’s mortgage rates, we need to look back in time. Charting the 10-year Treasury yield from the 1980s reveals a stark picture. In the early 1980s, yields peaked above 15%, and mortgage rates followed suit, climbing into the high teens. Ask your parents or someone in their 70s about their first mortgage. It’s likely they’ll recall rates around 12-14% in the mid-1980s.

Fast forward to today. While today’s 7% mortgage rates might seem high compared to the ultra-low rates of the 2010s, they’re still below historical averages. The average 30-year fixed mortgage rate from 1978 to 1998 was over 8%, as shown in historical data【7†source】.

The Yield Curve’s Role in Today’s Market

One key factor influencing mortgage rates is the yield curve’s recent reinflation. Longer-term debt, like 10-year Treasury bonds, has seen increasing yields over the last year. This reflects investor expectations for sustained economic growth and potentially higher inflation down the line. As long as these yields rise, mortgage rates will remain elevated【6†source】【7†source】.

What Does This Mean for You?

If you’re in the market for a new home or considering refinancing, it’s crucial to adapt to this new normal. Here are a few takeaways:

Adjust Your Expectations: Mortgage rates below 5% are unlikely to return anytime soon. Prepare for higher borrowing costs in your financial planning.
Reflect on Your Timeline: If you’re not in a rush, waiting might make sense. However, with home prices stabilizing in many areas, now could still be a good time to buy if you’re ready.
Consider Alternative Strategies: Be open to different borrowing strategies beyond a traditional mortgage to manage debt and liquidity. For instance, home equity lines of credit (HELOCs) or personal loans might offer flexibility depending on your financial situation. Additionally, carefully evaluate adjustable-rate mortgages (ARMs) or shorter-term fixed-rate loans as alternatives to a standard 30-year mortgage.

Higher Rates Benefit Savers

While higher interest rates can make mortgages more expensive, there’s a silver lining for savers. Higher rates are generating meaningful returns on cash that haven’t been available for years. Consider this: from 2010 to 2019, the average yield on a 10-year Treasury hovered around 2-3%. In 2025, yields are closer to 4-5%, offering a significant boost to those with savings in money market accounts, CDs, or Treasury bonds. If you’ve been disciplined about saving, this environment provides an opportunity to earn real returns on cash and fixed-income investments.

Looking Ahead

While we can’t predict the future with certainty, the signs point to mortgage rates staying high through 2025. By understanding the historical context and current market dynamics, you can make more informed decisions for your financial future. Remember, planning for the long term is always a winning strategy.

If you’d like to discuss how these trends impact immediate or near term financial decisions specific to your situation, feel free to reach out. At Sterling Edge Financial, we’re here to help you navigate the complexities of today’s financial landscape.

Disclosure: This article is for informational purposes only and does not constitute personalized investment advice. Interest rates, mortgage rates and other meaningful financial data around interest rates, lending and borrowing is constantly changing. Tax rates and laws may vary and are subject to change. Consult a financial advisor or tax professional for guidance tailored to your situation.