Will US Mortgage Rates Go Down In 2025?

Matt | Personal Finance

Will US Mortgage Rates Go Down, Remain The Same Or Go Up In 2025?   Despite the US Federal Reserve cutting rates, 30-year fixed mortgage rates have gone up in January 2025 instead of down! What’s going on?   In this Short, we look at the key reasons driving mortgage rates higher including 10-Year Treasury Bond Yields   #mortgage #mortgagerates #homeownership #home #property #flat #firsttimebuyer #movinghome

Transcript

00:00What influences mortgage rates? The first concept to understand is U.S. Treasury bond yields.

00:06Mortgage rates are largely influenced by these bonds rather than Federal Reserve rates. Treasury

00:11bond yields is the interest rate that the U.S. government pays to borrow money for 10 years,

00:17and what is happening to treasury bonds matters because it influences borrowing costs. Treasury

00:22yields often reflect what investors in the financial markets anticipate for economic growth,

00:28inflation, and monetary policy. As you can see from this graph, the average 30-year fixed mortgage

00:33rate and the 10-year treasury bond yield move closely in sync. When the bond yield increases,

00:40mortgage rates usually go up as well, and over the last three years we've seen an upward trend in both.

00:45So while the Federal Reserve cut rates in 2024, treasury bond yields have gone up to almost 5%,

00:51and this is the highest they've been since just before the financial crisis in 2008. This is bad

00:57news for the U.S. government as it means they must pay more to service their debts, and it's also bad

01:02news for borrowers, including mortgage holders, as mortgage interest rates greatly depend on which

01:08way bond yields are moving. For example, in December 2024, the 30-year fixed mortgage rate jumped to 6.72%

01:16compared to 6.6% just a week earlier. The rise was tied to changes in the bond market driven by higher

01:23inflation expectations and growing uncertainty in the economy. There are several factors that have

01:28contributed to the recent volatility that we've seen in the bond market. The first is that there

01:33have been concerns about inflation and government economic policies. The U.S. annual inflation rate

01:39is currently at 2.7%. Although it's moving in the right direction, it's still above the Federal

01:44Reserve's target of 2%, and many investors worry that it will be difficult to bring it fully under control.

01:50There's also uncertainty about the new Trump administration and what government policies

01:55could be introduced, such as policies to boost economic growth and tariffs, which could push the

02:01inflation rate further upwards and lead to higher interest rates. At the same time, rising U.S. federal

02:06debts and growing budget deficits has made investors increasingly cautious, which has put upward pressure

02:13on bond yields. The second point is that bond yields rise to attract investors. Treasury bonds are seen

02:19as a safe investment as they're guaranteed by the U.S. government, but investors tend to turn to higher

02:25return investment opportunities such as stocks and shares when the financial markets are growing.

02:30The return on the S&P 500 stock market index was around 24% in 2023. During that time, the average

02:38yield on a 10-year Treasury bond was less than 4%. It doesn't take an expert investor to work out which gave you

02:45a better return for your money. As demand declines for 10-year Treasury bonds, the bond yield rates rise to attract investors.

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