Projected Mortgage Rates for the Week of May 5-11, 2025

The question on many prospective homebuyers' minds as we move deeper into May 2025 is a crucial one: Can mortgage rates actually go down even if the Federal Reserve decides to hold off on cutting its benchmark interest rates? The short answer, based on current economic headwinds and market dynamics, is yes, it's possible, but the path won't be straightforward and depends heavily on factors beyond just the Fed's actions.

Projected Mortgage Rates for the Week of May 5-11, 2025

For months now, the housing market has been navigating a tricky landscape. We've seen average rates for a 30-year fixed mortgage bouncing between 6.5% and 7% since early spring, creating a sense of uncertainty for both buyers and sellers. The big elephant in the room, of course, has been the Federal Reserve's stance on interest rates.

Despite some hopes and even political pressure for cuts, particularly from the White House, the Fed has indicated its intention to remain cautious, as highlighted by Odeta Kushi, Deputy Chief Economist at First American Financial Corporation, who noted their “wait-and-see stance” leading into their May policy meeting (CNET).

Now, you might be thinking, “Wait a minute, don't the Fed's decisions directly dictate mortgage rates?” Well, that's a common misconception, and understanding the nuances here is key to grasping where mortgage rates might be headed. While the Fed's benchmark rate certainly has a ripple effect throughout the economy, influencing the cost of short-term borrowing, it doesn't directly set the rates you see advertised for home loans.

The Bond Market's Crucial Role

In my years of following the housing market, one thing has become abundantly clear: to truly understand the direction of mortgage rates, you absolutely must pay attention to the bond market. Longer-term rates, like those on the fixed-rate mortgages most of us are familiar with, are largely shaped by broader market forces. These forces include:

• Inflation Expectations: If investors believe inflation will remain high, they'll demand a higher return on long-term investments like bonds, pushing their yields up, and subsequently, mortgage rates.
• Credit Risk: The perceived risk of borrowers defaulting on their loans also plays a role. Higher perceived risk can lead to higher interest rates.
• Recession Probabilities: This is a big one right now. If the market starts to strongly believe a recession is on the horizon, investors often flock to the safety of U.S. Treasury bonds. This increased demand can drive bond yields down, which can, in turn, lead to lower mortgage rates.

As Kushi aptly put it, these are factors “beyond the Fed's direct control.” This week, the bond market's reaction to the Fed's ongoing policy outlook will be a major indicator of where mortgage rates are likely to land in May and beyond. (CNET)

How Could the Fed Still Indirectly Influence Mortgage Rates This Week?

Even though the Fed doesn't directly set mortgage rates, its actions and communications are far from irrelevant. The Federal Reserve is primarily tasked with two key goals: maximizing employment and keeping inflation under control. They use their benchmark interest rate as a primary tool to achieve these objectives.

• Fighting Inflation: When prices are rising too quickly, the Fed typically raises its benchmark rate. This makes borrowing more expensive across the board, aiming to cool down spending and slow down price increases.
• Stimulating the Economy: Conversely, when the economy shows signs of weakness and unemployment starts to rise, the Fed often lowers its benchmark rate to make borrowing cheaper, encouraging spending and investment.

Alex Thomas, a Senior Research Analyst at John Burns Research and Consulting, pointed out that the Fed was initially leaning towards rate cuts earlier in the year, anticipating a potential weakening in the labor market as inflation risks seemed to ease. However, the introduction of wide-reaching tariffs by the Trump administration has thrown a wrench in the works.

The Tariff Dilemma: Inflation vs. Recession

Trump's aggressive tariff policies have created a real Catch-22 for the Federal Reserve. As Brett Ryan, a Senior Economist at Deutsche Bank, explained, tariffs act like a supply shock, meaning they can directly push prices higher, leading to increased inflation. On the other hand, these tariffs can also stifle economic activity and potentially lead to job losses. (CNET)

This puts the Fed in a tough spot. If they focus solely on combating tariff-induced inflation by raising rates, they risk further slowing down the economy. If they prioritize preventing a recession by cutting rates, they could exacerbate inflationary pressures. This delicate balancing act is why the Fed is likely maintaining its cautious stance.

The Recession Wildcard and Mortgage Rates

The big question mark looming over the housing market right now is whether the risks of tariff-induced inflation will outweigh the potential for a recession in pushing mortgage rates in one direction or the other.

Historically, bad news for the economy has often been good news for mortgage rates. When the fear of a recession grows, investors tend to seek the safety and security of U.S. Treasury bonds. This increased demand for bonds can drive their yields down, and as we've discussed, lower bond yields can translate to lower mortgage rates.

However, there's a twist this time. The declining confidence in the U.S. economy, partly due to the uncertainty surrounding trade policies and potential austerity measures, might disrupt this typical pattern. Investors might be less inclined to flock to U.S. Treasury bonds if they have broader concerns about the nation's economic outlook.

What Economic Indicators Should We Watch?

While official unemployment figures haven't yet shown a significant surge, it's important to remember that layoffs and cutbacks often take time to appear in the data. As Logan Mohtashami, Lead Analyst at HousingWire, wisely notes, the economic data that economists and the Fed rely on tells us about the past, while investors are always acting based on what they anticipate for the future.

Therefore, keep an eye on leading indicators such as:

• Layoff announcements from major companies.
• Consumer confidence surveys.
• Manufacturing and services sector activity reports.
• Any signals of weakening consumer spending.

These forward-looking indicators can provide clues about the potential for a recession and how the bond market might react, ultimately influencing mortgage rates.

The Harsh Reality: Recession Relief Might Be Limited

Even if a recession does materialize and brings mortgage rates down, it's crucial to consider the broader implications. For many households facing job losses and financial hardship during an economic downturn, slightly lower mortgage rates might be a small consolation or even irrelevant. The ability to afford a home depends on much more than just the interest rate.

So, Should You Buy Now or Wait for Lower Rates?

It's understandable why many potential homebuyers are on the sidelines, hoping for mortgage rates to come down from their current levels. It's easy to look back at the pandemic era when rates dipped to around 2% and wish for a return to those days. However, most experts agree that getting below 3% on a mortgage is highly unlikely without a severe economic crisis.

Gregory Heym, Chief Economist at Brown Harris Stevens, offers a pragmatic perspective: “Trying to time everything perfectly is a losing proposition. Rates could go up or they could go down. The question is: Do you want a home?” (CNET).

This really hits the nail on the head. If you're in a financially stable position and have found a home that meets your needs and budget, waiting for some arbitrary rate target might mean missing out. Here's why:

• Rates might not fall significantly. As we've discussed, many factors influence mortgage rates, and a substantial drop isn't guaranteed.
• Home prices could rise. If demand picks up even slightly, especially in areas with limited inventory, prices could start to climb again, potentially offsetting any savings from a lower interest rate.
• Your personal circumstances matter most. Your job security, financial goals, and housing needs should be the primary drivers of your decision, not solely the direction of interest rates.

Focus on What You Can Control

Instead of trying to predict the unpredictable, experts recommend focusing on the fundamentals:

• Create a Realistic Homebuying Budget: Understand what you can comfortably afford each month, including the mortgage payment, property taxes, insurance, and potential maintenance costs. This will help you determine a suitable price range and mortgage amount.
• Shop Around for Mortgage Rates: Don't just settle for the first offer you receive. Different lenders offer different rates and terms. Comparing offers from multiple lenders can potentially save you a significant amount of money over the life of your loan. Don't be afraid to negotiate!
• Consider Refinancing Down the Road: If you buy now at a rate you can afford but later see interest rates drop significantly, you always have the option to refinance your mortgage to a lower rate.

Final Thoughts

Navigating the current housing market requires patience, a clear understanding of the economic factors at play, and a focus on your individual financial situation. While the possibility of mortgage rates edging down without a Fed rate cut exists, it's tied to complex dynamics within the bond market and the overall economic outlook, particularly the looming threat of recession. Instead of waiting for a perfect moment that may never arrive, concentrate on making informed decisions based on your own needs and taking steps you can control, like budgeting and comparison shopping.