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Mortgage rates fell, then rose. What comes next?

Mortgage rates fell steadily from this spring through September, as economic data slowed and as investors began to expect a steady string of interest rate cuts from the Federal Reserve. But the rate on a 30-year mortgage has reversed course and climbed sharply over the past month to 6.79% nationally, from about 6.1% at the start of October.  (Dreamstine )
Jeanna Smialek and Danielle Kaye New York Times

Rafael Corrales, a real estate agent in Miami, recently showed houses to a young couple hoping to move from a rental into a home. They had been lured to the market after hearing that mortgage rates had come down.

But when the couple went to get approved for a home loan, they found that borrowing costs had ticked up once again.

“They were very confused,” said Corrales, 49, an agent for Redfin. It pushed them back onto the sidelines of the housing market, and they’re now staying put in the hope that rates will fall again.

Mortgage rates fell steadily from this spring through September, as economic data slowed and as investors began to expect a steady string of interest rate cuts from the Federal Reserve. But the rate on a 30-year mortgage has reversed course and climbed sharply over the past month to 6.79% nationally, from about 6.1% at the start of October.

The move has come as a shock to some homebuyers, who had waited many months for Fed officials to begin lowering borrowing costs, hoping that they would bring relief to the mortgage market.

The logic was fairly simple. When the Fed lowers its benchmark interest rates, the downward shifts tend to trickle through financial markets to lower other interest rates. While the biggest impact is on short-term rates, the effect can extend to 10-year Treasury notes, which mortgages closely track. And the Fed is, in fact, adjusting policy. Officials cut interest rates for the first time in four years in September, and they followed with a quarter-point rate cut Thursday.

But other recent developments have helped counteract the rate cuts.

For one thing, market-based rates such as mortgages tend to move in anticipation of future Fed policy — not the policy at the moment when the cuts happen. And just how much the central bank will manage to lower rates next year is increasingly in doubt. The economy has been stronger than expected, which could argue for less aggressive Fed reductions. Donald Trump’s election as president only further fuels uncertainty.

Trump has proposed a cocktail of tariff increases and tax cuts that could stoke inflation, economists and investors say. As a result, White House policy could prevent Fed officials from lowering borrowing costs by as much as they otherwise might. In fact, Wall Street investors began to bet on higher inflation and fewer rate cuts as Trump’s victory came into sight. And mortgage costs also move for reasons other than the Fed outlook: Expectations for higher deficits could also help push them up, for instance.

The upshot for homebuyers is an unsatisfying one. Many economists do expect mortgage rates to fall again in the months to come, but exactly how far is murky.

Greg McBride, chief financial analyst at Bankrate, said he was expecting that “the new normal over the next couple years will be mortgage rates in the 5s and 6s.” Daryl Fairweather, chief economist at Redfin, said she thinks rates will drop to around 6% over the next 12 months.

Either would be far above the sub-3% rates of 2021 — or even the 3% to 4% rates that were common in the 2010s — and higher than what some economists were projecting just a few months ago.

“I do think that with time rates will fall,” said Igor Popov, chief economist at Apartment List. “But I don’t think we’re looking at a near-term future that’s going to take us back to 3% mortgage rates.”

Trump promised to lower interest rates sharply — including mortgage rates — from the campaign trail. But the president has no direct control over Fed policy.

And analysts across Wall Street projected that Trump’s campaign promises would risk keeping interest rates at least slightly higher than they otherwise would be. In fact, the yield on 10-year Treasury bonds jumped 0.2 percentage points Wednesday, the biggest move in more than two years.

Some economists say that with the election now over and at least that source of uncertainty fading, rates will slowly come down next year.

“Rates have gone up in the past two weeks, but I think it’s mostly because of volatility leading up to the election,” Fairweather said.

But with mortgage rates poised to stay much higher than they were as recently as 2021, the housing market may remain stuck.

Many owners who locked in super-low mortgage rates at the height of the pandemic are unwilling to sell and walk away from their comparatively lower monthly payments. That, in turn, limits how many starter homes are for sale — which means that even with weaker demand from buyers, prices have continued to rise.

The lock-in effect “restricts mobility, results in people not living in homes they would prefer, inflates prices and exacerbates economic inequality,” researchers at the Federal Housing Finance Agency wrote in a recent paper. They estimated that more than 1.7 million home sales had been forgone over the past two years.

Michael Kosch, who lives in Grosse Pointe Shores, Michigan, a suburb of Detroit, has a mortgage rate of about 1.9%, locked in during the depths of the pandemic. The house he and his wife bought in 2020 does not meet all of their needs: The couple and their young daughter could use an extra bedroom, a bigger garage and an upstairs laundry. But when they started scoping out nearby homes this summer, they flinched at the rates.

“Even if mortgage rates come down into the 5% range, you just can’t give it up,” Kosch said, referring to his pandemic-era deal. They opted to fix up their home instead.

And if the combination of hefty prices and high borrowing costs persists, it is likely to keep affordability historically poor.

It is not clear that White House policy will provide much help in the years to come. Trump has suggested slashing regulations, which housing economists have said could help somewhat.

But he has also blamed immigrants for pushing up housing costs, even though economists point out that their impact is probably limited, and that they also help expand the housing supply as a central part of the construction workforce.

And while Trump at one point promised that he would bring mortgage rates “back down to, we think, 3%, maybe even lower than that,” he cannot force the independent Fed to lower rates or buy bonds to make that happen.

High rates and high prices are posing a problem for people like Scott Grillo, a renter in Rochester, New York, who has been looking to buy his first home but who has been held back by costs. He has been waiting for the 30-year mortgage rate to dip below 5% before making the leap.

“I’m looking for the perfect moment, which doesn’t always happen, but I’m crossing my fingers,” Grillo said.

Corrales, the Redfin agent in Miami, is also watching, as many prospective buyers make similar choices. He said some had been waiting for the election, eager to see what might come next.

“Both sides of the table are waiting for rates to be sub-6,” Corrales said.

But rates now seem unlikely to decline quickly to the levels that Grillo and Corrales are looking for — if at all.

“The housing market distortions that we’ve seen are maybe becoming even more entrenched, or at least persisting longer than people had initially thought,” said Lu Liu, an assistant professor of finance at the Wharton School at the University of Pennsylvania. “That’s certainly something that the new administration will have to deal with.”

This article originally appeared in The New York Times.