Why Are Mortgage Rates Stuck at Such High Levels?

The average 30-year mortgage rate as of this writing is 7.09%, reports Freddie Mac. And that wouldn't be so terrible if it weren't for the fact that home prices are elevated due to a glaring lack of inventory.

The combination of higher mortgage costs and home prices is keeping a lot of would-be buyers on the sidelines these days. But why is it that mortgage rates are stuck at such high levels? And what's it going to take for them to come down?

Today's rates aren't actually that bad

The mortgage rates buyers are seeing today might seem pretty terrible. But historically speaking, a 30-year mortgage at just over 7% isn't so bad -- not when you compare that rate to the 17% and 18% rates mortgages borrowers were looking at in the early 1980s.

Rather, the reason 7% mortgages are looking so awful today is twofold. First, it's that today's rates are coming at a time when home prices are up. To put it another way, borrowers may have been looking at higher mortgage rates in the 1980s, but home prices were notably cheaper.

Secondly, what adds to the rub for home buyers today is that just a few years ago, it was possible to sign a 30-year mortgage at around 3%. The problem is that mortgage rates began climbing in 2022 and did so to a pretty extreme degree in short order.

In December 2021, it was still possible to get a 30-year loan at around the 3% mark. By December 2022, that same loan was averaging over 6%.

Broad rate cuts could lead to relief for mortgage borrowers

A big part of the reason mortgage rates are so elevated right now is because borrowing is more costly in general following a string of interest rate hikes from the Federal Reserve that took place in 2022 and 2023. Once the Fed starts to cut interest rates, mortgage rates will likely follow suit to some degree.

And there's some good news -- the Fed has signaled that it's looking to cut rates starting in 2024. We don't know exactly when the central bank will implement its first rate cut. But from there, the average 30-year mortgage rate might slip below 7% and keep going in that direction.

How to save on a mortgage

While mortgage rates have been stuck at high levels in the absence of broad rate cuts, things could be changing for the better soon. But if you want to lock in the lowest mortgage rate possible, no matter when you're buying and what rates look like in general, it pays to:

• Shop around with different mortgage lenders and compare offers
• Boost your credit score, whether by paying down credit card debt or correcting credit report errors
• Keep your debts on the low side relative to your income

In time, mortgage rates should start to slide downward. From there, homeownership may become more affordable for a lot of people. But taking the above steps could result in big savings for you even once mortgage rates start to come down in general.