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Mortgage rates at 3% were an ‘anomaly.’ Here’s what a normal 30-year rate looks like.

Home buyers are frustrated by 7% mortgage rates. One economist suggests that they’ll need to get used to them.

Since the Federal Reserve started hiking interest rates in mid-2022, mortgage rates have doubled, surpassing 7%.

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Higher mortgage rates have resulted in significantly higher monthly mortgage payments and made buying a home harder to afford. At a rate of 7%, the median monthly mortgage payment for a $392,200 home is roughly $2,800, near a record high, according to a Redfin analysis. At a rate of 3%, that monthly payment would be close to $1,800.

Yet if one takes a longer view of the U.S. economy and mortgage-rate trends, the data clearly show that the 30-year rate is nowhere near its peak. In the 1980s, that rate went up to 18%, more than double where it was as of early June 2024.

In fact, based on historical averages, mortgage rates are closer to a “normal” rate now than they were during the pandemic, Doug Duncan, chief economist at Fannie Mae FNMA, told MarketWatch in an interview.

Between 1950 and 2000, the 30-year fixed-rate mortgage averaged roughly 6%, Duncan said. But during the pandemic — due to the Fed’s actions in easing monetary policy to support the U.S. economy amid widespread closures of businesses and other shutdowns — the 30-year mortgage rate fell as low as 2%. Many borrowers snapped that up.

So “a 6% mortgage rate is not unusual historically,” Duncan said. “It’s just that people saw these 3% mortgage rates and got spoiled. But that’s a historical anomaly. … Unless there’s some catastrophic economic event for the broader economy, we wouldn’t expect to see mortgage rates back at 3% in our lifetimes.”

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Mortgage rates expected to drop to 6% early next year

On a longer-term basis, home buyers can expect some relief, as Duncan sees the 30-year mortgage rate falling below 6% over the next few years.

During that period between 1950 and 2000 when rates averaged 6%, inflation-adjusted economic growth averaged 3%, Duncan said. In comparison, with the Congressional Budget Office forecasting the U.S. economy to grow by between 2.1% and 2.2% per year through 2029, and factoring in the federal debt that would need to be funded through the issuance of U.S. Treasury bills, Duncan said he expects a more normal range for mortgage rates would be between 4.5% and 6%.

Home buyers can expect the 30-year rate dip to below 7% as early as the start of next year, according to Fannie Mae. In its May housing forecast, the government-sponsored mortgage-financing enterprise set expectations for the 30-year mortgage rate to fall to 7% by the fourth quarter of 2024. It also expects rates to drop below 7% in 2025, starting in the first quarter, and to finish the year at 6.6%. That forecast assumes that the Fed cuts interest rates twice by the end of 2024.

Lock-in effect is showing signs of fading

Fannie Mae also expects the growth in home prices to slow over the next few years. After a 6.6% rate of increase in 2023, home-price increases are expected to slow to a yearly gain of 4.3% in 2024 and 3.2% in 2025, Fannie Mae said, based on a survey of 100 experts as part of its quarterly Home Price Expectations Study.

And the so-called lock-in effect, which is holding up housing supply, is expected to fade. The lock-in effect refers to the number of home listings being abnormally suppressed as homeowners with ultralow mortgage rates put off selling their homes to avoid taking on a new mortgage at a higher rate. In the Fannie Mae study, 84% of respondents said the lock-in effect is diminishing and contributing to an increase in listings.

Home listings are surging in the West, up nearly 40% in San Jose, Calif., 22% in Phoenix, 21% in San Diego and 18% in Denver, according to Redfin data, for the four weeks ending June 2.

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