30-year conventional mortgage rate

The 30-year conventional mortgage rate is projected to rise to 6.8% by 2025, reflecting continued pressure from higher U.S. government debt levels and increased government bond issuance, which have driven yields higher. The resulting increase in long-term borrowing costs has supported the rise in mortgage rates, despite the Federal Reserve's recent cut in the federal funds rate in September 2024. Macro-level influences include persistent inflation, investor risk appetite, and the return profiles of alternative asset classes, with mortgage rates remaining linked to the yields of comparable fixed income securities such as Treasury notes.

The mortgage rate environment between 2021 and 2025 was characterized by significant volatility driven by both pandemic-related disruptions and monetary policy responses. Rates remained historically low in 2021, averaging 2.96%, though variants such as Delta and Omicron led to ongoing uncertainty and a brief pause in their upward momentum. A combination of consumer and commercial spending rebound, rising wages, and supply chain constraints resulted in heightened inflation, compelling the Federal Reserve to implement a series of aggressive rate hikes throughout 2022. This rapid tightening cycle drove the mortgage rate sharply higher, jumping from 2.96% in 2021 to 5.33% in 2022 and then reaching 6.8% by 2025. Inflation expectations influenced the trajectory of rates over this period, with the Federal Reserve slowing the pace of interest rate increases in 2023 as inflationary pressures moderated. The Fed reduced rates by 2024, but mortgage rates continued to rise due to enduring fiscal concerns and a lack of robust investor demand for government securities, which kept yields and mortgage spreads elevated.

Additional macroeconomic trends affecting the period included volatile capital flows into fixed income markets and persistent concerns about the sustainability of U.S. fiscal policy, both of which contributed to the upward movement in mortgage rates. The interrelationship between monetary policy and government borrowing needs meant that even dovish central bank actions in late 2024 could not fully offset the impact of larger Treasury issuance and shifting investor sentiment. Mortgage rates broadly tracked broader trends in fixed income markets throughout the 2021-2025 period, responding not only to Federal Reserve actions but also to exogenous shocks such as the pandemic and evolving fiscal policy environments.

The pivot from an exceptionally accommodative monetary stance following the COVID-19 pandemic to a more restrictive environment defined the 2021 to 2025 period, in response to inflationary pressures and increased government borrowing. As a result, 30-year mortgage rates increased by 3.7 percentage points over the period, with the interplay of inflation, government debt, monetary policy, and investor preferences all contributing to rate movements.