February Mortgage Outlook: Drifting Downward

Mortgage rates might drift downward in February after bumping against a ceiling in January.

The 30-year fixed-rate mortgage peeked briefly above 7% in January, then promptly ducked lower. It loitered just under 7% at the end of January, exhibiting little movement as the calendar page flipped to February.

Inflation holds the steering wheel when it comes to mortgage rates, and the inflation rate has driven a bumpy downward road for more than two years. As long as investors believe the Federal Reserve is succeeding at taming inflation, mortgage rates will likely settle lower.

How rates could go the other way

Mortgage rates aren't guaranteed to fall. They could rise on news of economic vigor. Specifically, if inflation flares up, or if businesses hire more workers than expected, investors might nudge mortgage rates higher to compensate for the risk of continuing price increases.

Borrowers can watch for two releases of economic data in February. First, the employment report for January is scheduled to be released the morning of Feb. 7. If it shows unexpectedly strong job growth, then mortgage rates could rise immediately after.

Second, the consumer price index for January is scheduled for release on Feb. 12. According to the Federal Reserve Bank of Cleveland's inflation forecast, core CPI is expected to fall to 3.1% in January, down from 3.2% the previous month. If the CPI comes in higher than expected, we might see an increase in mortgage rates.

There's another source of uncertainty: The possibility that the Trump administration could impose tariffs, or some other policy that investors deem inflationary. Such an announcement could push mortgage rates upward. And it could happen without warning.

The smart thing to do is to proceed along your personal timetable. After the Federal Reserve kept short-term interest rates unchanged at the conclusion of its Jan. 29 meeting, Chair Jerome Powell said the central bank "is very much in the mode of waiting to see what policies are enacted. We don't know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy."

If the Fed doesn't know, then you don't know, either.

This is a long way of telling you that you shouldn't delay getting a mortgage on the expectation that rates will fall. Rates might not cooperate with this forecast — especially with an unpredictable administration in power.

What other forecasters predict

Two prominent organizations — the Mortgage Bankers Association and the secondary market titan Fannie Mae — predict that the average rate on the 30-year mortgage will remain 6.7% or higher in the first quarter of 2025. With one month in the books, the average rate has been a whisker under 7%. So Fannie and the MBA expect rates to remain steady or drop slightly.

Freddie Mac, a competitor to Fannie Mae, struck a similar chord in its economic outlook. "Unlike last year when many were anticipating that mortgage rates would decline, in early 2025 the prevailing sentiment is that rates will stay higher for longer," Freddie said.

The Freddie forecast detects impatience among prospective home sellers and buyers who sidelined themselves last year, waiting for mortgage rates to fall. They might take action this year, Freddie said.

How these rates affect the housing market

Mortgage rates have risen high enough to squeeze home buyers' pocketbooks. As a result, people cautiously take more time to buy homes. Houses, in turn, remain on the market longer. This results in a growing inventory of homes for sale.

There were 1.15 million existing homes for sale at the end of December, according to the National Association of Realtors. That figure is 160,000 more than the inventory a year earlier.

If you're familiar with the law of supply and demand, you might conclude that the bigger inventory of houses must have kept prices in check. But it didn't. The median price of an existing home was $404,400 in December, 6% higher than a year before, according to NAR. That was the largest year-over-year percentage increase since October 2022.

Prices hit that level because the demand for houses remains strong. At December's sales pace, it would take 3.3 months to sell all of the houses on the market. A 3.3-month supply is paltry. "So 3.3 [months] is still implying tight market conditions and that is why home prices are rising," said Lawrence Yun, NAR's chief economist, at a press briefing.

What I predicted for January and what happened

At the beginning of January, I wrote that mortgage rates would "finish lower than where they started" because they had jumped at the end of December. Mortgage rates "sometimes overdo it before falling back down," I explained.