Prediction: Here's Where Mortgage Rates Are Headed Over the Next Year

With the Federal Reserve Board set to lower the federal funds rate next week, it feels like everyone has kind of let out a mental sigh of relief that rates will finally be headed back down.

But life is balance, and so are interest rates. With the federal funds rate on the move, the next big question is this one: Where are mortgage interest rates headed?

Mortgage interest rates and the Federal funds rate

The federal funds rate is the rate at which banks loan each other money, not the rate at which they loan consumers money. Generally speaking, you'll always see credit card and mortgage interest rates higher than the federal funds rate because banks have to make money to keep the lights on.

But even though mortgage interest rates aren't directly affected by the federal funds rate, they do tend to trend together, though not with a consistent spread between them. If the federal funds rate goes down, mortgage rates will go down -- that's essentially a given.

Some of the biggest indicators for a change in the federal funds rate are unemployment rates and inflation. The Fed uses the federal funds rate to influence both. Overall, the long-term inflation target is about 2% on average, but unemployment is a softer target -- it simply should be as low as possible, given economic conditions.

Where mortgage rates are going in 2025

Given that the unemployment rate in August 2024 was at 4.2%, among the lowest levels historically, and the inflation rate for the 12 months ending August 2024 was 2.5%, down from 2.9% just a month prior and 3.2% for the year ending July 2024, it would be really easy to just say that there's no way mortgage interest rates could go up from here.

But the truth is a lot messier. In fact, it may be most mortgage lenders' worst nightmare.

Because it's an election year, mortgage rates will depend on who wins the election. As of Sept. 12, 2024, it's anybody's guess. A wide range of polls show that Harris and Trump are near-tied.

And although a million different things can affect unemployment and inflation, administrative policies are a big one. Most candidates promise a lot more than they can possibly deliver, given that they have to work with Congress to get anything passed, but there are a few issues that economists have already identified as problematic for the federal funds rate over the long term.

This is a very short rundown of factors to consider.

Harris

Although much of Harris's policies are likely to be carryovers from the Biden administration, realistically, she has proposed a few policies that could push inflation up. The first-time home buyer tax credit, if widely adopted and improperly timed, might push housing prices further upward, as more buyers go back to competing over limited housing.

Other policies aimed at encouraging development need to be in place first, and more housing available, before these take effect. Otherwise, further housing inflation is likely.

The updated child tax credit Harris is proposing, which will be a blessing for parents, may also be a curse for inflation. More money can mean more spending, and often more spending means more jobs, which is great -- but sometimes it also just creates more inflation, as companies try to capture more of that money for each item they create.

These are both relatively minor influences, however, and can be balanced very simply.

Trump

Trump's general approach to policy is inflationary, from his proposed import tariffs to his proposed aggressive deportations. High tariffs are not, as he claims, paid by the country they're imposed upon. They're paid by us in the form of higher costs of goods.

If he suddenly makes the cost of Chinese manufactured goods 60% higher, China doesn't pay that -- we pay that. And that directly adds to inflation -- as much as 1/10 of a percent per percent increase in tariff rates, according to Goldman Sachs.

The potential for mass deportations is another factor. I don't think it's any secret that a great deal of farm and construction labor is done by immigrants with questionable legal status. Because of said status, these people often do these jobs at far below market wages.

Deporting 8.3 million unauthorized immigrants who are working in low-wage jobs is going to have a similar effect to what happened when we started losing workers to COVID-19 in 2020. Wages shot up overnight, and so did inflation, because it cost a lot more to hire workers from a significantly smaller pool, which drove up the price of doing business.

On top of that, certain industries would be decimated. According to Pew Research, in 2020, 14% of agricultural workers were undocumented, as were 12% of construction workers, 8% of hospitality workers, and 6% of manufacturing workers.

You think food and housing is costly now? Wait until a whole bunch of workers in those industries disappear.

Future mortgage rates are unpredictable

It's impossible to know where rates will go until we know who the next president will be. Current indicators point to a lower mortgage rate under Harris and a higher mortgage rate under Trump. This is not a bias; this is based on factual data that is publicly available for anyone to examine.

You can help choose where rates will go in 2025 at the polls on Election Day. I hope to see you there.