As always, it’s been hard to determine the path forward for mortgage rates.
They’re never easy to predict, but since the new administration took over, it’s been even harder.
You can blame it on a few things, whether it’s the DOGE-led government layoffs, the tariffs and wider trade war, or the general uncertainty of it all.
For example, just last week the FHA said it will no longer allow non-permanent residents to get mortgages.
Simply put, you just don’t know what you’ll wake up to on a given day, which makes forecasting that much harder. But now it appears storm clouds are brewing and that could finally push rates lower.
Bad News Starting to Become Good News Again for Mortgage Rates?
There’s a saying with mortgage rates that bad news pushes them lower. The general idea is that a slowing economy leads to lower inflation, which in turns leads to lower interest rates.
When the going gets tough, investors seek safety in boring investments like bonds, namely U.S. Treasuries like the 10-year bond.
They tend to make the move out of riskier stocks and into bonds for their perceived safety and guaranteed return, even if it’s lower.
But when stocks are no longer expected to outperform, a lower return is better than no return.
Conversely, if the economy (and inflation) is running hot, as it has the past several years, monetary policy would need to be tightened and interest rates would rise.
That’s exactly what happened and explains to some extent why the 30-year fixed climbed from sub-3% to 8% in the span of less than two years.
But things were kind of confusing for the past few years because bad news and good news got muddled.
This was essentially because inflation was the Fed’s number one target, and any excessive growth in wages or employment was seen as the biggest risk to the economy.
For example, in 2023 better-than-expected economic data forced the Fed to pump the brakes on any expected rate cuts.
This was seemingly good news because it meant the economy was still growing and sound, but it resulted in high mortgage rates and a stock market selloff late that year.
[Where would mortgage rates be today if Kamala won?]
Rate Cuts vs. a Recession
Then as recession fears increased, the Fed finally pivoted and signaled rate cuts were coming, leading to a stock market rally. Of course, this “bad news” was presented as “good news.”
Powell explained that the economy was in a better position with moderating inflation, but that downside risks to unemployment increased, which justified rate cuts.
Next we entered a kind of “soft landing” narrative where the Fed managed to thread the needle of rising inflation and slowing economic growth and unemployment.
Then an unexpectedly-hot August jobs report was delivered in early September. Good news was good news as stocks climbed and mortgage rates also surged higher.
But the market shifted from worrying about inflation to focusing on employment, so it was OK.
Before long, the same Fed was being lambasted for cutting too much, too soon as inflation seemed to perk up again.
It’s as if the market wanted to keep getting bad news, aka slowing inflation and weaker jobs reports, so stocks could climb and interest rates could fall.
If you recall in late 2024, there were warnings that a hot jobs report could send stocks lower.
The idea was hot data would force the Fed to tighten monetary policy and stop cutting. And that’s kind of what happened.
Now we’ve got tariffs and a trade war, which are seemingly inflationary but enough to sink the economy at the same time, with Goldman Sachs raising recession odds to 35% from 20%.
So while the market originally interpreted tariffs as bad for mortgage rates, larger implications may lead to lower rates.
Now There’s Talk of Falling Mortgage Rates at the Expense of the Economy
So we basically went from a place where good news was bad news because a hot economy meant no rate cuts or easy money.
Then to a bad news was good news situation because the economy was cooling and unemployment was rising, which meant a more accommodative Fed.
Then to a good news was good news dynamic because we found some sense of stability, so inflation cooling and job growth still positive, but not too positive.
But now we’re entering the dreaded bad news is bad news portion of the journey.
Where bad news is actually bad news for the economy, the stock market, the housing market, etc.
Sure, mortgage rates might come down if the economy continues to show signs of slowing as consumers pull back on spending and unemployment rises.
However, you’ve now got a scenario where there’s a weaker consumer, more layoffs as businesses struggle to stay open, and rising inventory in the housing market.
It’s more important to have a job than it is a mortgage rate that’s a half-point lower, after all.
And when you zoom out, we still have a 30-year fixed mortgage rate well above 6% when it was sub-3% as recently as 2022.
This makes it difficult to root too much for lower mortgage rates, knowing they pale in comparison to what’s happening more broadly in the economy.
Homeowners and renters will feel poorer as the wealth effect of high-priced stocks and frothy home prices loses its shine.
And perhaps the only real winners will be those able to apply for a rate and term refinance to lower their rate from say 7.25% down to 6.25%.
This is why I’ve mentioned for a long time that there’s no inverse relationship between mortgage rates and home prices.
People think they act like a seesaw where one goes up and the other down.
But guess what? As the economy starts to show signs of cracking, we could find ourselves in a scenario where home prices and mortgage rates fall in tandem.
Instead of that fantasy where sidelined buyers rush in as rates fall, you might see inventory rise as prices cool.
It’s one of those be careful what you wish for situations.
Read on: Mortgage rates vs. recessions
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.
