New Forecast Predicts 3.6% Mortgage Rates by End of 2021

A recent mortgage rate forecast for 2021 predicted that home buyers in the U.S. could encounter higher interest rates as we move further into the year. The forecast was issued by the research team from the Mortgage Bankers Association, with long-range predictions extending through 2022.

The industry group’s forecast predicts that the average rate for a 30-year fixed mortgage loan could rise to around 3.6% by the fourth quarter of 2021. When this article was published, in late March, that average stood at 3.09%.

A Look Back, a Look Forward

Throughout 2020, mortgage rates generated a slew of headlines by dropping to record lows. Today, as we approach April 2021, they’re generating headlines for the opposite reason. Rates have crept upward over the past few weeks, and that has gotten the attention of a lot of home buyers and mortgage shoppers.

During the week of March 18, 2021, the average rate for a 30-year fixed mortgage loan was 3.09%. That’s based on the weekly industry survey conducted by Freddie Mac, which dates back five decades. This particular forecast goes out to dozens of mortgage lenders across the country. Freddie Mac’s research team then compiles an average rate, based on feedback from survey respondents.

Rate chart March 2021
Chart: Average 30-year mortgage rates | Source: Freddie Mac PMMS

As you can see from this chart, rates dropped steadily through most of 2020. Over on the right, you can see the all-time record low of 2.65% that occurred in early January 2021. That was the lowest average in more than 50 years of record-keeping. It’s possible we may never see rates that low again in our lifetimes.

As a result of those record-low borrowing costs, mortgage lenders enjoyed a surge of new business from homeowners refinancing their existing loans. Low mortgage rates have also given a boost to the housing market, helping it perform strongly despite the economic damage associated with the pandemic.

Mortgage Rate Forecast: 3.6% by Year’s End?

So that’s where we right now, as of late March. But what about the future? What’s the general forecast for mortgage rates through 2021 and into 2022?

According to a pair predictions from industry analysts, 30-year mortgage rates could hover between 3% and 3.6% for the rest of 2021. So there doesn’t appear to be a huge sense of urgency for home buyers, at least on the borrowing front. (Home prices are another story, and we’ve covered that below.)

The most recent forecast comes from the research team at the Mortgage Bankers Association (MBA). On March 22, 2021, the MBA made a prediction that 30-year mortgage rates would inch upward over the coming months to reach 3.6% by year’s end. That would be slightly higher than where we are right now.

Here is a quarterly breakdown of the MBA’s latest mortgage rate forecast:

  • Q1, 2021: (2.9%)
  • Q2, 2021: (3.2%)
  • Q3, 2021: (3.4%)
  • Q4, 2021: (3.6%)

Looking further out, the industry group expects 30-year mortgage rates to hit 3.7% at the start of 2022 and climb toward 4.5% by the end of that year.

A separate mortgage rate forecast predicted slightly lower numbers than the MBA’s prediction above. Back in January, the economic research team from Freddie Mac published an update to their quarterly housing forecast. In it, they predicted that 30-year home loan rates would essentially hover around 3% throughout 2021.

To quote Freddie Mac’s January forecast:

“This low mortgage interest rate environment is projected to continue through 2021 and 2022 as the Federal Reserve has voted to keep the interest rates anchored near zero for a longer period of time, if needed until the economy rebounds.”

They went on to add that the average interest rate for a 30-year fixed home loan is “forecasted to average around 2.9% through the end of 2021.”

(It’s worth noting at this point that the 30-year fixed is the most popular type of home loan among borrowers, and by a wide margin. That’s why you hear so much about it in the news.)

Of course, none of this is set in stone. As we’ve often said, housing market and mortgage rate predictions are the equivalent of an educated guess. Analysts examine current trends within the mortgage and real estate industries — along with the broader economy — an issue forecasts based on those conditions. It’s an imperfect science, to say the least. So we shouldn’t take it as gospel.

Federal Reserve Maintains a Steady Course

The Federal Reserve plays a part in all of this. While the U.S. central bank does not directly determine mortgage rates, they do have a strong indirect influence over consumer borrowing costs and trends.

We’ve seen this correlation many times in the past. Generally speaking, when Fed officials hold the federal funds rate at low levels, mortgage interest rates tend to follow suit. And that’s exactly what the Federal Reserve is doing right now.

Throughout most of the coronavirus pandemic, the Fed has held the short-term federal funds rate near zero. It’s part of a broader economic stimulus program. And they are giving no signs that they will alter course anytime soon.

At their last official policy meeting, in mid-March 2021, Fed officials stated:

“The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

In other words, more of the same. The mortgage rate predictions from MBA, Freddie Mac and others have no doubt factored this into the mix.

Economic Growth Could Boost Rates

There’s another important factor that could influence borrowing costs going forward — the broader economy. Generally speaking, mortgage rates tend to rise during times of economic growth and improvement. On the other hand, they tend to decline when the economy stumbles.

That’s what we saw during 2020. Over the past year or so, rates dropped in a fairly steady fashion as the economy struggled.

But now, things are starting to look up from an economic standpoint. The U.S. economy gained more jobs in February 2021 than economists had predicted. Most of those job gains were within the hospitality and service industries, which were hit hard during the pandemic.

The ongoing vaccine rollout and easing of economic restrictions will likely produce even more job growth going forward. As we move further into 2021, the U.S. economy could continue its upward climb. This in turn could increase demand for mortgage loans and put upward pressure on home loan interest rates.

Here’s the bottom line to all of this. Based on current economic conditions, Federal Reserve policy, and recent mortgage rate forecasts for 2021, it seems likely that the average rate for a 30-year home loan will hover between 3% and 3.5% throughout 2021.

So if you’re in the market for a home loan — and you’re waiting for a return to the “glory days” of 2.65% mortgage rates — you might want to rethink your strategy. It seems highly unlikely they’ll drop to that level again anytime soon. Or ever.

Home Prices Continue to Climb in the U.S.

Mortgage rate forecasts suggest that borrowers could see slightly higher interest costs as we proceed through the second, third, and fourth quarters of 2021. But from a home buyer’s perspective, there’s an even bigger concern. After a year of steady growth, house values in most U.S. cities are expected to continue rising for the foreseeable future.

In addition to offering mortgage rate predictions, the MBA forecast cited above suggested that home prices in the U.S. could climb by around 10% during 2021.

And in March of this year, the research team at Zillow issued the following statement: “United States home values have gone up 9.9% over the past year and Zillow predicts they will rise 11.4% in the next year.”

Rising rates are a concern for future home buyers, as always. But rising prices could present bigger challenges, especially for those buyers who are already getting squeezed out of the market.

The point being: A strong argument could be made for buying a home sooner in 2021 rather than later, to avoid steeper costs down the road.

Disclaimer: This article includes mortgage predictions and forecasts that were issued by third parties not associated with the Home Buying Institute. Economic and housing-related projections are the equivalent of an educated guess and should be treated as such.