I get this question almost every week, usually from someone who has a friend or a parent sitting on a 2.75% rate from 2021. And I get it, those rates were incredible. But I'd rather give you the honest answer than the hopeful one, so here it is... barring another global catastrophe, I don't think we're going back there.
Let me explain why.
3% was never normal
Freddie Mac has been tracking the 30-year fixed rate since 1971, and for most of that history, rates lived somewhere between 5% and 8% (with a long stretch in the double digits in the late 70's and 80's). Even after the 2008 financial crisis, when the Fed went all in to support the economy, rates mostly bounced between 3.5% and 4.5%.
The all-time low came in January 2021, when the average 30-year rate hit 2.65%. That wasn't the market doing its thing. That was the result of a once-in-a-century emergency response.
What actually happened during COVID
When the pandemic hit in March 2020, the Federal Reserve did two big things at once:
- It cut its benchmark rate to essentially zero. That's the rate banks charge each other overnight, and it sets the tone for borrowing costs across the whole economy.
- It started buying bonds, a LOT of them. This included mortgage-backed securities (bundles of home loans that investors buy and sell). The Fed committed to at least $200 billion of them right away, then kept buying about $40 billion a month. By the time it was done, its balance sheet (everything it owns) had ballooned to nearly $9 trillion.
When the biggest buyer in the world shows up and keeps buying mortgage bonds no matter what, the price of those bonds goes up and the yield (interest) goes down. Since mortgage rates are based on those yields, rates fell to levels we'd never seen before.
So, the 2.65% rate wasn't a sign that money was cheap. It was a sign that the Fed was making it cheap on purpose, to keep the economy from falling off a cliff.
And we're still paying for it
Here's the part that doesn't get talked about enough. All that cheap money had to go somewhere, and a big chunk of it went into two places.
Inflation. Inflation hit 9.1% in June 2022, the highest in about 40 years. The Fed had to slam on the brakes, raising rates faster than at any time since the early 80's. And it still hasn't fully put the fire out. Inflation was 3.7% last month, and the Fed actually raised rates again in September.
Home prices. When rates dropped below 3%, buyers could suddenly afford a lot more house for the same monthly payment, and they bid prices up accordingly. National home prices jumped over 40% in about two years. Those prices didn't come back down when rates went up, so today's buyers are stuck with pandemic-era prices AND post-pandemic rates. OUCH.
There's a third hangover too. About half of all homeowners with a mortgage still have a rate under 4%, which means they don't want to sell and give it up. That's kept the number of homes for sale low, which keeps prices high. It's a cycle, and it's a direct result of that 2020 and 2021 rate environment.
Why the Fed won't do it again (unless it has to)
The Fed learned a hard lesson. It kept rates at zero and kept buying bonds for too long, and the result was the worst inflation in four decades. It's not going to repeat that mistake without a very good reason.
And right now, the Fed is moving in the opposite direction. It raised rates in September, inflation is running well above its 2% target, and the 10-year Treasury yield (which mortgage rates follow closely) has been above 5%. Both Fannie Mae and the Mortgage Bankers Association are forecasting rates in the high 6's through at least mid-2027, and those forecasts were made before rates climbed to where they are now.
That being said, never say never. The only times rates have gotten anywhere near 3% were during a global financial crisis and a global pandemic. If something on that scale happens again, sure, the Fed may pull out the same playbook. But I don't think anybody should be hoping for that, and you definitely shouldn't build your housing plans around it.
Bottom line
We are still living with the side effects of the COVID-era rate environment, in the form of higher prices and stubborn inflation, and the Fed is still trying to clean it up. A return to the 3's isn't a realistic plan. A rate in the 5's or 6's would be a much healthier "normal," and if you're buying now, the goal is to get into a home you can afford at today's rate, and treat any future drop (and a chance to refinance) as a bonus, not the plan.
If you want to talk through what today's rates actually mean for your budget, give me a call.
Rates and market figures in this note describe the period covered and are for general information only. They are not a loan quote, a rate offer, or a rate lock. Mortgage rates change daily and vary by borrower, loan program, and day of lock.
Want this run on your actual numbers?
Everything above is a worked example. Give me your real figures and I'll tell you what it looks like for you, with no application and no credit pull.