Mortgage Rates Drop, But Buyer Activity Remains Tepid Amid Fed Uncertainty
Mortgage rates saw a modest decline last week, but the slight shift did little to spur buyer activity in the housing market. The average rate on a 30-year fixed-rate mortgage dipped five basis points to 6.79% for the week ending February 20, according to rates provided to NerdWallet by Zillow. A basis point is equivalent to one one-hundredth of a percentage point.
Despite this being the lowest average so far in 2025, the decline is not drastic compared to the mid-January peak, which was only about a quarter of a percentage point higher. Over the past year, mortgage rates have hovered within a relatively narrow range of 6.5% to 7%, reflecting a period of relative stability in borrowing costs.
However, the possibility of a significant drop in mortgage rates remains uncertain, largely influenced by the Federal Reserve’s policy decisions and economic outlook.
Federal Reserve Unlikely to Cut Rates Soon
The Federal Reserve plays a crucial role in determining the direction of interest rates, including those on mortgages. While the Fed began cutting the federal funds rate last fall, its January meeting signaled a pause in that campaign, dampening expectations for further cuts in the near future.
The primary concern for the Fed remains inflation, which it aims to keep at a target rate of 2%. When inflation rises too quickly, the Fed raises interest rates to cool economic activity, while slowing inflation can lead to rate cuts to encourage borrowing and spending.
Minutes from the Fed’s January meeting, released this week, highlighted a divide among policymakers. Some officials believe inflation is under control, while others express concern that trade and immigration policies could lead to renewed inflationary pressures. Given the recent uptick in the Consumer Price Index, an important inflation gauge, the outlook for a rate cut at the Fed’s next meeting in March remains dim.
Bond Market Policy: A Potential Wild Card
While a federal funds rate cut seems unlikely in the short term, another policy lever could influence mortgage rates: the Federal Reserve’s approach to bond purchases.
During the pandemic, the Fed intervened by purchasing trillions of dollars in Treasury bonds and mortgage-backed securities (MBS) to support the economy. These purchases helped drive mortgage rates to historic lows by increasing demand for MBS, which, in turn, pushed rates down.
However, in 2022, the Fed reversed course, halting new bond purchases and allowing existing bonds to mature without reinvestment, a process known as balance sheet “runoff.” This policy shift led to a decline in demand for MBS, contributing to the rise in mortgage rates.
Recent discussions within the Fed suggest that policymakers are considering slowing or even halting the balance sheet runoff. The process was previously slowed in May 2024 and is set to conclude this summer. If the Fed decides to hold onto its remaining MBS instead of allowing them to mature, it could help push mortgage rates lower by increasing demand for these securities.
The Road Ahead for Mortgage Rates
While the bond market scenario presents a potential path for lower mortgage rates, it remains speculative at best. Homebuyers hoping for more affordable borrowing costs will likely need to wait for clearer signals from the Federal Reserve. For now, mortgage rates remain relatively stable, but without a significant policy shift, a major drop appears unlikely in the near future.
Buyers and industry experts will be closely monitoring the Fed’s next moves, particularly regarding inflation data and bond policy decisions, as they will play a critical role in shaping mortgage rates for the rest of the year.
