Home buyers and sellers are mostly on the sidelines right now.
Most homeowners with mortgages are sporting “golden handcuffs,” afraid to sell and give up interest rates that are many percentage points better than the current market.
With little available supply, prices that remain expensive and mortgage rates that are much higher than they were in recent years, buyers are waiting out the market.
The common denominator, of course, is those mortgage rates. When will they go down? That’s what a listener of the Clark Howard Podcast recently asked.
When Will Mortgage Rates Go Down? And How Far Will They Dip?
Do you think mortgage rates will fall?
That’s what a Clark listener wondered on the May 23 podcast episode.
Asked Aimee in Florida: “I’m a teacher and single mom in a fast-growing part of Florida. I want to sell my 100-year-old house since it’s worth double what I paid (about $170,000 in profit).
“Obviously it’s not a great time to turn around and buy again. How long would I have before capital gains tax to rent somewhere and hope the interest rates will come down? Do you think they will?”
Want to make an educated guess about mortgage rates in order to inform your housing decisions? Watch the monthly CPI number that the U.S. government uses to define inflation, Clark says.
As long as that number continues to decline, expect mortgage rates to follow.
“Mortgage rates are never going back to the artificially-manipulated 2% range barring some extremely unexpected event in the world,” Clark says. “Inflation is continuing to go down. Hopefully that trend line will continue.
“And so mortgage rates should settle lower than they are now. I’m putting this guess in the complete danger category. But I think we could see rates back in the 5s again. Very unlikely back in the 4s. Could be 15-year loans go back into the 4s.”
Clark noted that the Federal Reserve interest rates are slightly above the rate of inflation now, “which is where they should be.”
What the Collective Market Says About Future Rates
After peaking at a year-over-year increase of 9.1%, U.S. inflation fell below 5% in April for the first time in two years.
The Fed hiked the effective interest rate to a range of 5% to 5.25% on May 3.
There’s some disagreement between what the Fed has been signaling in their public comments and market predictions. Investors still think that the Fed could cut interest rates as soon as this year, potentially to curtail a recession.
However, the two-year Treasury rates just climbed from 3.75% to 4.24% in less than three weeks. Meanwhile, the five-year and 10-year rates sit at 3.76% and 3.70% respectively. So the market is predicting rates to be 1.25% to 1.5% lower than they are now within the next two to five years.
According to Bankrate, the average 30-year fixed mortgage features an APR of 7.15% and the average 15-year fixed mortgage sits at 6.52%.
So you can see how market data supports Clark’s prediction of mortgage rates falling into the 5% range within the next couple of years, and maybe a touch below 5% for 15-year fixed mortgages.
Why Mortgage Rate Watchers Should Pay Attention to the Fed
The best indication of what’s going to happen will come from the Fed, which will meet five more times this year.
For a time this spring, the Fed signaled it may pause interest rate hikes. That coincided with several major bank failures and ongoing contagion concerns within the banking sector.
But the Fed also vowed to prioritize squeezing inflation out of the economy when it started hiking rates in March 2022. And it recently left the door open for it to continue hiking rates. Inflation has not been falling as swiftly. And at 4.9%, it’s still not close to the Fed’s stated goal of 2%.
If the Fed continues hiking rates longer than the market anticipates, you may have to wait longer for mortgage rates to decline. The opposite is also true.
Capital Gains Taxes on Real Estate
If you’ll recall, Aimee also was worried about potential capital gains taxes on the profit from a potential home sale.
There’s great news for her on that front.
“Aimee, from the way you phrased the question, this is the house you live in. So you pocket that money tax-free. If you have a gain of up to $250,000 as a single individual, $500,000 as a couple, you just pocket that money,” Clark says.
“You don’t have to buy another property as long as you’ve been in it two years or longer. Two of the last five years. This $170,000 is tax-free money to you. And you can rent as long as you want after that.
“There used to be the rule that you had to buy a new place within a period of time. People were gaming that so much Congress finally was like, ‘Let’s make this simple,’ and came up with this new system that you just pocket the money. It’s almost like a house has become its own version of a Roth IRA if you live in the house.'”
If you’re part of the crowd that wants to buy a house but you’re waiting for better mortgage rates, you’ve got mixed news.
It’s highly unlikely that mortgage rates will revert back to historic numbers of 2-3%. However, based on all current data, there’s a pretty good chance that a 15-year fixed rate will flirt with dipping below 5% by the end of 2025.
You may save in the neighborhood of 1.5% on your mortgage rate if you can wait another few years, although that’s never guaranteed. And Clark has also predicted that home prices will stagnate for a few years.
In other words, it should be a better time to buy a home in a few years. But don’t expect some dramatic occurrence where you can get a 3% mortgage rate and 30% off of current home prices.