What Does It Actually Mean to Return to Lower Mortgage Rates?

Recently, a lot of people have argued that we won’t return to lower mortgage rates.

That there’s no possible way we can go back to low mortgage rates.

Thing is, when they say that, they’re always thinking about 3% mortgage rates, maybe 4%.

In reality, mortgage rates could go down quite a bit from current levels and still be a lot higher than they used to be.

Simply put, they can go lower without being considered “low” again.

Remember When a 4.5% Mortgage Rate Sounded Super High?

A couple years ago, a friend of mine purchased a home and took out an adjustable-rate mortgage (ARM).

Back then, he got a rate of 4.5%, which at the time sounded super steep. Not in the least bit attractive.

And again, it was an ARM, so it’s not like it was a slightly costlier 30-year fixed. It was both higher in price than what everyone had been used to and not fixed for more than five years.

Back then, 4.5% sounded super high. Why? Because we were used to rates in the twos and threes.

Months before he locked in his rate, you could still get a 30-year fixed at 3.25%.

So it’s always relative to what you’re used to. And he and everyone else was used to seeing rates that started with a 2 or a 3.

I wrote a while back that once we saw higher rates, our brain would think a rate of 5% or 6% would seem actually pretty decent.

And now, with the benefit of hindsight, that couldn’t be truer.

How Does a 5% Mortgage Rate Look Today?

If you presented someone with a 5% mortgage rate today, they’d probably say it looks pretty darn good.

This is simply because they’ve been seeing rates that start with seven or eight lately.

So why wouldn’t it look good to see something that starts with five? Maybe even a six at this point.

This is the exact opposite of what happened when we went from 2% and 3% mortgage rates up to 6% mortgage rates.

This is the silver lining working in favor of mortgage rates at the moment.

Human psychology has a way of making things look not so bad once you’ve experienced much worse.

A year ago, the 30-year fixed hit a near-21st century high of 8%. Then rates rallied and made their way down to around 6% in September.

For the record, that high was 8.64% during the week of May 19th, 2000, per Freddie Mac, and we never really got that close (peaked at 7.79% in late October 2023).

They’ve since bounced back to 7%, likely due to Trump winning a second term as president and many expecting higher inflation under his watch.

Where they go from here is another question, which I’ve also already talked about.

What I Mean When I Say Mortgage Rates Can Go Lower

Now back to that question of “lower.”

Whenever I talk about mortgage rates now, I frame them using recent levels. While that might sound obvious, it seems to get lost on people often.

So if I say rates can go back down again, or move lower from here, it doesn’t mean back to 2% or 3%.

It’s simply means they can go back down from say 6% or to 5%.

The idea here is it’s not some crazy return to what now feels like unsustainable low rates.

It’s simply a return to something in between. And when you think about it, something in between seems pretty darn reasonable.

Kind of like Goldilocks.  Not too high, not too low.  Maybe just right!

Not too high to make housing prohibitively unaffordable and out of reach for everyone.

But not too low that demand revs up again and home prices surge.

Granted, there’s not a strong correlation between home prices and mortgage rates anyway.

But that’s been the narrative lately, given how low rates were. Remember, they can fall together if the economy weakens and fewer buyers are willing or able to buy homes.

Of course, it’s not really up to us to decide where rates go next, or the Fed for that matter. The direction of mortgage rates will be based on the relative strength or weakness of the economy.

The amount of government spending in coming years may also play a role, as increased bond issuance could lead to lower bond prices, which means higher interest rates to compensate.

Let’s just hope rates find a good place that leads to better equilibrium in the housing market, where buyers and sellers can transact again in a healthy manner.

Read on: How to track mortgage rates.