Tariffs, Inflation, and the Fed: What’s Next for Mortgage Rates
Tariffs. A government-efficiency task force. No Tariffs. Court challenges. New tariffs. The start of the new presidential term has been unprecedented. Mortgage rates remain in the mid-6%’s, and experts now predict they won’t fall much this year.
Taking a wait-and-see approach, the Federal Reserve has paused rate drops, citing concerns about economic growth, the potential effects of policy actions under the new administration, and persistent inflation which (excluding food and energy) remains at around 3.1%, versus the Fed’s desired 2% target.
Low inventory for sale continues to be a dominant factor in market dynamics. While rates are actually only about 1% above their long-term historical average, the effect on market psychology is real. Until rates come down, the “lock-in effect” is expected to continue. “(This) effect, where homeowners are reluctant to sell due to low existing mortgage rates, will continue to constrain inventory in 2025,” said Ali Wolf, Zonda Chief Economist. Those would-be sellers are not excited about roughly doubling their mortgage rates.
This sets up a second dynamic, which is that there are still more willing buyers (despite higher rates) than there are properties. Home price increases have moderated but are still a fact in most markets. Nearly every prediction, from CoreLogic to Morgan Stanely to Zillow, expects home prices to rise 2% or more this year, and in 2026.
“If mortgage rates remain stubbornly high, we can expect a continued period of subdued home sales and price growth,” concurred Mark Zandi, Chief Economist, Moody's Analytics. The CalculatedRisk blog reported that “sales in January, at 4.08 million on a seasonally adjusted annual rate basis were down from December and still historically low. Sales averaged almost 5.5 million (monthly, annualized, seasonally adjusted) in the January 2017-2020 period. So, sales were still about 25% below pre-pandemic levels.”
We’ll have to see what happens. If a recession unexpectedly materializes later this year, interest rates should drop and improve buying power.
At the same time, it seems unlikely that a recession would lower house prices very much, given low supply and high pent-up demand – lower rates are widely expected to bring millions of sidelined buyers back into the market.
If you’re in need of a larger home, or downsizing, fence-sitting may not be a great strategy. Financially-sound borrowers usually have an opportunity to refinance once rates move down.
And if you’re like others who plan to sit tight, tapping into equity to improve your home may also be a great move, and we can help with that too.
Either way, let’s put a plan in place to help you pursue those dreams!
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