It’s possible mortgage rates — which have recently hovered under 6.6% — will drop to 6%, one economist noted, but it could take a couple of years to get there.

Key points:

  • Since mortgage rates are more contingent on the overall economy than real estate specifically, it is difficult to forecast when they will rise and fall.
  • This year’s tariff wars and resulting concerns about inflation delayed what was expected to be a downward trend in mortgage rates.
  • A weakening labor market could send rates lower, but economists expect this to occur gradually — and with a few bumps along the way.

As the real estate industry waits for mortgage interest rates to drop into a range that’ll spark homebuyer activity, guessing when rates will rise and fall has become a frustrating game for many due to how intertwined these shifts are with other economic factors.

It would be simpler if mortgage rates were only tied to housing supply and demand. But rates are affected by so much more — and the economic surprises that can pop up from one day to the next make forecasting difficult.

A prime example of rate unpredictability occurred last September when the Federal Reserve began cutting short-term interest rates. While this kind of move can push mortgage rates in the same direction, rates instead went the opposite way amid growing inflation concerns.

For Daryl Fairweather, chief economist at Redfin, the biggest surprise in the past year has been the tariff war and its impact on rates.

“It’s hard to think back to this time last year, but at least for me I did not think the tariffs were really a possibility,” Fairweather told Real Estate News, adding that she’d thought the tariffs proposed at that time by then-presidential candidate Donald Trump would become an unfulfilled campaign promise.

“That is why the Fed hasn’t been able to cut interest rates, and that’s why we still have this rate environment we’re in,” Fairweather said.

A tug of war over inflation, weakening labor market

Inflation and job market shifts are both strong influences on 10-year treasury yields and mortgage rates.

The impacts of Trump’s tariffs continue to surprise economists. While inflation has ticked up, companies have so far avoided passing many of the cost increases on to consumers. Instead, the job market started weakening as those companies began focusing on lowering labor expenses as a strategy for cutting costs.

“Instead of prices going up, it seems to be that the impacts are perhaps jumping straight to the labor market, which I think is what Jerome Powell was starting to show concern for,” Fairweather said, referring to the Fed chair’s Aug. 22 speech at the Jackson Hole Economic Symposium. Powell’s comments, which suggested a September short-term interest rate cut is possible, sent 30-year mortgage rates closer to the 6.5% range.

So what does this mean going forward? Fairweather expects mortgage rates to eventually drop closer to 6%. But that process will be bumpy, and it could take longer than many potential buyers would want — possibly a couple of years.

“If you wait that long, you might be facing a rent increase or higher home prices,” Fairweather said. “The thing that I always try to tell homebuyers and homesellers is that you can’t really time the economy, but you can time your own life.”

What could make rates fall faster?

For those looking for a quicker drop, the narrowing spread between mortgage rates and the 10-year treasury yield might offer some hope. According to a recent Redfin report, the spread as of Aug. 22 was at its lowest level in three years, with room to narrow further. A low spread tends to lead to lower mortgage rates.

In the report, Chen Zhao, Redfin’s head of economics research, compared the spread to “a restaurant meal,” explaining, “The treasury yield is the cost of raw ingredients, the mortgage rate is the price of the meal on the table, and the spread is the restaurant’s markup, which covers the cost of the chef, rent on the restaurant, profit margin,” and so on.

“Regardless of the cost of raw ingredients, if the restaurant has a lower markup, that lowers the customer’s bill,” Zhao said. “Similarly, regardless of the Fed’s actions, a lower mortgage spread helps lower mortgage rates.”

Given that the spread is only one factor, most real estate economists are expecting a slow but steady improvement, with snags along the way. The good news for buyers is that the market no longer favors sellers to the extent that it did during the pandemic frenzy, noted Mark Fleming, chief economist at First American.

“For those prospective buyers who have been waiting on the sidelines, the housing market is finally starting to listen,” Fleming said.