U.S. Long-term Mortgage Rate Relaxes to...
The U.S. housing market has been experiencing a slump since 2022, with sales of previously occupied homes sinking to their lowest level in nearly 30 years in 2024. This trend can be attributed to a combination of factors, including record-high home prices and elevated mortgage rates.
Mortgage rates in the U.S. are influenced by several key factors, such as the health of the economy, inflation levels, Federal Reserve policies, bond market yields, national debt, and demand for home loans.
A strong economy tends to increase mortgage rates, as borrowing demand rises. Conversely, a weaker economy can lower rates to stimulate borrowing. Currently, the U.S. economy seems to be holding up OK despite pressures from tariffs and elsewhere.
Inflation drives lenders to raise rates to protect their returns. Although U.S. inflation is moderate, it remains a factor in the current market trends.
The Federal Reserve’s monetary policy, including its federal funds rate and balance sheet management, heavily affects mortgage rates. For example, shrinking the Fed’s balance sheet tends to push rates higher. The Fed is expected to hold its key short-term interest rate steady at its upcoming meeting next week.
Bond market yields, especially the 10-year Treasury yield, are closely tied to mortgage rates. Higher yields generally lead to higher mortgage rates. As of mid-2025, the 10-year Treasury yield is at 4.41%.
The national debt and government borrowing can also push interest rates upward. The U.S. national debt continues to rise, but its impact on mortgage rates remains a topic of debate among economists.
Demand for home loans also plays a role in determining mortgage rates. When demand rises, lenders may increase rates due to higher processing costs, and vice versa.
The effect of these factors is evident in current market trends: mortgage rates have risen to around 6.75% for 30-year loans in mid-2025, up slightly from recent lows but similar to levels a year ago. This increase in mortgage rates has had a noticeable impact on the housing market by reducing affordability.
Higher borrowing costs increase monthly mortgage payments, squeezing buyers’ purchasing power. Rising home prices and high mortgage rates have made homeownership financially untenable for many Americans. In fact, the average rate on a 30-year U.S. mortgage was 6.78% a year ago, and the 30-year mortgage rate has remained relatively close to its high this year, at just above 7%.
The lowest point for the 30-year mortgage rate this year was in early April at 6.62%. Despite record-high home prices—which have continued to rise but at a slower pace—the high mortgage rates are discouraging many potential buyers, leading to sluggish sales and historically low levels of previously occupied home transactions.
Elevated mortgage rates are also discouraging many homeowners from selling because they locked in mortgage rates when they were much lower. The average rate on a 15-year fixed-rate mortgage decreased to 5.87% this year, providing an opportunity for homeowners looking to refinance their mortgages.
In summary, mortgage rates rise due to economic strength, inflation, Fed policy, bond yields, and debt, which in turn, by pushing borrowing costs higher, depress housing affordability, thereby contributing to record-high home prices paired with a sales slump in the U.S. housing market.
- The Federal Reserve's monetary policy, such as its federal funds rate and balance sheet management, heavily affects mortgage rates, as shrinking the Fed's balance sheet tends to push rates higher, contributing to the rise in mortgage rates in the U.S.
- Elevated mortgage rates, currently at around 6.75% for 30-year loans, have had a noticeable impact on the housing market by reducing affordability, making homeownership financially untenable for many Americans due to higher borrowing costs that increase monthly mortgage payments.
- The demand for home loans plays a significant role in determining mortgage rates; when demand for home loans rises, lenders may increase rates due to higher processing costs, as seen in the current market trends where increased demand is helping drive mortgage rates higher.
