It is unlikely that mortgage rates will decrease in the near future, as explained here.

• According to Freddie Mac data, the rates on a 30-year fixed mortgage surpassed 7% during the week that ended January 16.
• Mortgage rates were below 3% as recently as late 2021.
• President Donald Trump's policy agenda is causing investor worries, which is partly why the stock market is unlikely to fall below 6% until 2026, economists said.

Despite the Federal Reserve's reduction of interest rates, mortgage rates have increased in recent months.

According to economists and finance experts, market forces are unlikely to ease much in the near term, which is why those opposing movements may seem counterintuitive.

Homebuyers face a difficult decision: either postpone their home purchase or proceed with current mortgage rates, which are complicated by rising home prices, according to experts.

According to Lee Baker, a certified financial planner in Atlanta and a member of CNBC's Financial Advisor Council, it is unlikely that an interest rate of 4% or a 20% drop in housing prices will occur in the near future.

Mortgage rates at 7% mean a 'dead' market

Since late September, rates for a 30-year fixed mortgage have gradually risen, with the latest increase occurring during the week ended Jan. 16, when they surpassed 7%.

Consumers are experiencing a sudden increase in mortgage rates, as they were paying less than 3% for a 30-year fixed mortgage in November 2021, but the Fed raised borrowing costs sharply to control U.S. inflation.

"According to Mark Zandi, chief economist at Moody's, if anything exceeds 7%, the market will be considered dead and no one will purchase it."

To revive the housing market, mortgage rates must drop to 6% or lower, according to him.

According to a Bankrate analysis, consumers with a 30-year, $300,000 fixed mortgage at 7% would pay approximately $1,996 a month in principal and interest, which is about $400 more than the monthly payment of $1,610 at 5%.

The Fed reduced its benchmark rate three times in September, by a full percentage point, as inflation slowed down.

Zandi stated that mortgage rates are unlikely to fall back to 6% until 2026, as there are underlying factors that will not disappear rapidly.

Zandi stated that there is a possibility that mortgage rates will increase before they decrease.

Why have mortgage rates increased?

According to Baker, the founder of Claris Financial Advisors, mortgage rates are more closely linked to the yield on than to the Fed's benchmark interest rate.

The Treasury yields were approximately 4.6% on Tuesday, an increase from the 3.6% recorded in September.

Treasury bond yields have increased recently due to concerns about inflation from President Donald Trump's proposed policies, according to experts.

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If policies such as tariffs and mass deportations of immigrants are implemented, experts predict that inflation will increase. As a result, the Fed may slow down the rate at which it lowers borrowing costs, and there is a possibility that it may raise them again.

Recently, Fed officials mentioned "upside risks" to inflation due to the possible consequences of trade and immigration policy changes.

Zandi stated that investors are concerned about the potential increase in the federal deficit resulting from a large package of anticipated tax changes under the Trump administration.

There are other factors influencing Treasury yields, too.

Zandi stated that the Fed has been decreasing its holdings of Treasury bonds and mortgage securities through its quantitative tightening policy, while Chinese investors have become more cautious in their purchases of Treasurys and Japanese investors are less interested due to the ability to earn a return on their own bonds.

According to Joe Seydl, senior markets economist at J.P. Morgan Private Bank, it is predicted that mortgage rates will likely remain above 6% until 2026, assuming all conditions remain constant.

The mortgage premium is historically high

Lenders typically price mortgages at a premium over 10-year Treasury yields.

On average, the premium, also known as a "spread," was about 1.7 percentage points higher from 1990 to 2019, according to Seydl.

The current spread is approximately 2.4 percentage points above the historical average.

The higher spread can be attributed to factors such as market volatility, which led to more conservative mortgage underwriting, and the regional banking "shock" in 2023, which resulted in a severe tightening of lending standards, according to Seydl.

He stated that housing affordability will continue to be a significant challenge in 2025.

The higher premium is "intensifying the housing affordability issue" for consumers, Seydl stated.

In November, the typical homebuyer spent $406,100 on an existing home, which is a 5% increase from the $387,800 spent in the previous year, as reported by the National Association of Realtors.

What can consumers do?

Baker advises consumers to consider whether buying a home is the best financial decision at present, or if they should continue renting for the time being.

To make their mortgage more manageable, Baker advised those looking to purchase a home to aim for a "substantial" down payment.

He advised against subjecting savings for a down payment to the unpredictability of the stock market.

He cautioned against gambling with that in the market.

A roughly 4% to 5% return can still be obtained by savers through money market funds, high-yield bank savings accounts, or certificates of deposit.

Some consumers might prefer an adjustable rate mortgage over a fixed rate mortgage, which could offer a lower rate initially but may result in higher payments later due to rate fluctuations, according to Baker.

"You're taking a gamble," Baker said.

He advised against the approach for someone on a fixed income in retirement because it's unlikely they could afford the potentially higher monthly payments in the future, he stated.