When Will Mortgage Rates Go Back Down?

Short Answer: Not soon. Not based on what I’m seeing.

If you’re waiting for mortgage rates to fall back toward historic lows before buying a home, prepare for a long wait.

The 30-year fixed rate was 7.33% on Oct. 23, according to Mortgage News Daily. That’s down from a three-year high of 7.61% on Oct. 5, but it’s still high enough to keep millions of would-be buyers on the sidelines. Long-term Treasury yields have kept climbing, and the Fed raised its policy rate in September.

To understand where mortgage rates are headed, you have to watch the bond market. Right now, it’s signaling that relief will be slow to arrive.

Why the bond market matters

Mortgage rates don’t follow the Fed’s short-term policy rate directly. They track the yield on the 10-year Treasury, which was around 4.95% on Oct. 23. As long as it stays near 5%, mortgage rates have little room to fall.

For rates to come down, the 10-year has to drop. That won’t happen until inflation moves steadily toward the Fed’s 2% target, and it hasn’t yet. Headline inflation was running at 3.7% in September. Bond investors are still demanding higher yields to protect against inflation and to absorb heavy federal borrowing.

My forecast

• End of 2026: about 7.1%. Large federal deficits, sticky inflation and investors demanding more to hold long-term bonds keep the 10-year high. Expect only modest relief over the next two months.

• Mid-2027: about 6.8%. By then I expect inflation to be coming down steadily, with the 10-year drifting toward the low 4% range.

• End of 2027: about 6.5%. If inflation keeps cooling and the 10-year gets closer to 4%, mortgage rates follow.

  
  

The wild card: the spread

One thing could lower mortgage rates even if Treasury yields stay put: the spread between mortgage rates and the 10-year Treasury.

Historically, that gap has averaged about 1.7 percentage points. Today it’s about 2.4.

It’s wider for two reasons. First, rates have been bouncing around, and investors want extra pay to hold mortgage bonds when they can’t tell where rates are headed or how quickly borrowers will refinance. Second, there are fewer big buyers of mortgage bonds. The Fed’s holdings continue to shrink, and banks have pulled back.

Once rates settle down, that gap should start to close. If the spread got even halfway back to normal, it would take about a third of a point off mortgage rates with no help from the bond market. I don’t expect that before the new year, but it’s the most likely reason rates surprise on the low side in 2027.

The catch

The fastest way to get lower inflation, and lower bond yields, is a weaker economy. With the Fed focused on inflation, it may be willing to let the job market soften.

Lower rates driven by layoffs don’t help housing much, though. Buyers who lose their jobs don’t care what the rate is.

What this means for housing

Rates between the high 6s and mid 7s keep the market frozen. Owners with cheap mortgages stay put, sales stay low, and prices drift rather than crash. That fits the regional split I’ve written about before.

The markets hurt most by high rates are the stretched ones: Florida, the Mountain West, California, and here in the Pacific Northwest. Monthly payments there already take the biggest share of income, so there’s no room left.

Bottom line

Expect mortgage rates to ease slowly, from the low 7s today to about 6.5% by the end of 2027. If you’re planning to buy, don’t build your plans around a big drop in rates. A narrowing spread is the best hope for a pleasant surprise. A weakening job market is the risk that would bring rates down for the wrong reasons.