May Mortgage Rate Forecast – NerdWallet

Mortgage rates will probably remain above 7% in May as inflation resists the Federal Reserve’s efforts to bring it under control. It left rates unchanged at the conclusion of its April 30-May 1 meeting, and seemed as frustrated by inflation and high interest rates as home buyers are.

The Fed is trying to wrestle the inflation rate down to 2%. The central bank made progress toward that goal in the last half of 2023, and investors rang in the new year with hopes of a Fed rate cut by spring. But the inflation rate sprang a surprise: It hardly budged in the first three months of the year. Investors have convinced themselves that inflation will stick around for a while. Mortgage rates have moved higher as a consequence.

The 30-year mortgage leapt more than a quarter of a percentage point in April. Mortgage rates are unlikely to fall significantly until inflation wanes and the Fed signals that it’s getting ready to announce a rate cut. It’s unlikely that we’ll see such a turnaround by Memorial Day.

The outlook was sunnier just a few months ago. As 2023 turned to 2024, it looked as if inflation was waning in earnest. The core consumer price index had fallen every month since March. From that month to December, core CPI fell from 5.6% to 3.9%. Investors took it as a sign that inflation was headed toward the Fed’s 2% goal, and that the central bank would cut the short-term federal funds rate in the first half of 2024.

But progress on prices slowed dramatically in 2024’s first quarter, as if the inflation rate had deployed a parachute. In March, core CPI was 3.8%, or just 0.1 percentage point lower than in December. At that rate of decline, it would take more than four years for the inflation rate to drift down to 2%.

“In recent months, there has been a lack of further progress toward the committee’s 2% inflation objective,” the Fed’s rate-setting committee announced at the conclusion of the April 30-May 1 meeting.

The statement added that the Fed won’t cut rates until the committee “has gained greater confidence that inflation is moving sustainably toward 2%.” That seemed to push a rate reduction months into the future.

Financial markets now expect the Fed to wait until September or November before reducing the federal funds rate. The dashed hopes for a springtime reduction led lenders to raise mortgage rates in April.

The average rate on the 30-year fixed rate mortgage moved upward week after week throughout April. In Freddie Mac’s weekly rate survey, it averaged 6.79% in the last week of March, then marched upward to 7.17% in the week ending April 25.

Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors all predict that mortgage rates will fall over the next 12 months. Their forecasts have the 30-year fixed-rate mortgage dropping to below 6.5% in the first quarter of 2025, compared with an average of 6.75% in the first quarter of this year.

Home prices are rising along with mortgage rates. The combination of higher prices and mortgage rates is making it harder to afford a home. According to the Mortgage Bankers Association, the typical mortgage payment was $2,021 for home buyers who applied for mortgages in March. That was $108 more from 12 months earlier. This means that the median mortgage payment went up 5.2%. At the same time, the median income went up 3.5%, according to the MBA. House payments are rising faster than incomes.

Homebuilders have been offering relief in the form of temporary rate buydowns. With a rate buydown, the builder reduces the buyer’s house payments for the first one to three years. They do it by subsidizing the buyer’s interest rate.

Here’s an example of how a one-year buydown might work: The buyer gets a mortgage with a 7.25% interest rate, but the first 12 payments are based on a 6.25% interest rate. That gives the buyer a discount on the monthly payments for that year.

Builders do this in recognition of the effect of rising rates and prices. “To address affordability for home buyers, we are still using incentives such as mortgage rate buydowns and we have reduced the prices and sizes of our homes where necessary,” said Bill Wheat, the chief financial officer of D.R. Horton, a prominent homebuilder, in an earnings call April 18.

The takeaway is that some homebuilders are cutting rates, even if the Fed isn’t.