September Mortgage Outlook: Rates Should Fall Again

Mortgage rates have fallen four months in a row, and they’ll probably go down in September and extend the streak to five months. There are two related reasons: Inflation is subsiding, and the Federal Reserve is about to reduce short-term interest rates.

Before getting into what’s expected in September, let’s pull out the megaphone to cheer for the progress mortgage rates have made in less than a year:

• In late October 2023, the 30-year mortgage rate peaked near 8%.

• In April, it bounced around but averaged roughly 7%.

• It has declined every month since then, and at the end of August it settled at around 6.25%.

The inflation rate tumbled over a similar period. The consumer price index fell from 3.2% in October to 2.9% in July (the most recent data available). Inflation usually cools when unemployment rises, and that’s what has happened. The unemployment rate rose from 3.8% in October to 4.3% in July.

“Inflation has declined significantly. The labor market is no longer overheated,” Federal Reserve Chair Jerome Powell said in an Aug. 23 speech.

The combo of falling inflation and rising unemployment has pushed mortgage rates lower and convinced the Fed that it should cut short-term interest rates sooner rather than later to prevent too many job losses. “The time has come for policy to adjust,” Powell proclaimed in the Aug. 23 speech. That seems like a mild statement, but in the soft-spoken world of central bankers, Powell’s declaration of victory over inflation was comparable to a running back spiking the ball in the end zone.

According to financial market indicators, investors believe the Fed is certain to cut the overnight federal funds rate at its meeting scheduled to end Sept. 18. That’s one of the reasons mortgage rates fell in August: Mortgage rates usually move up or down in anticipation of expected Fed rate moves.

Even better news is farther downfield: More rate cuts are deemed likely at the meetings that end Nov. 7 and Dec. 18. The prospect of those rate cuts is likely to drive mortgage rates lower in September and the months after.

You might expect lower mortgage rates to stimulate home sales, but potential home buyers “remain reluctant to make the jump,” said Mark Palim, deputy chief economist and vice president for Fannie Mae, in a statement. “Even with moderately lower mortgage rates, affordability remains close to historic lows due to the high level of home prices relative to incomes.”

High home prices are definitely tackling buyers. But it’s instructive to note how affordability has been boosted by the decline in rates since last fall. Take a home buyer who can afford to pay $2,200 a month in principal and interest. When the 30-year mortgage was 7.75% in October, that buyer could borrow about $307,000. With a 6.25% mortgage rate, they could borrow $357,000. That’s a $50,000 increase in buying power.

The affordability picture will improve at least through the middle of 2025, according to forecasts from the Mortgage Bankers Association and Fannie Mae. Both organizations expect the 30-year mortgage rate to drop by around half a percentage point, maybe a bit less, through the second quarter of 2025. So far, the average rate for the third quarter is 6.65%, roughly in line with the forecasts.

The 30-year mortgage rate fell substantially in August. In Freddie Mac’s weekly survey (which the above forecasts are based on), it averaged 6.5%, down from 6.85% in July.