Mortgage rates have been a hot topic in the housing market for years, with homeowners, buyers, and investors alike keeping a close eye on fluctuations. During the early days of the COVID-19 pandemic, mortgage rates dipped to historic lows, falling below 3% in many cases. Today, however, rates hover significantly higher, making sub-5% mortgages feel like a distant memory. But what would it take to see rates drop below 5% again? Is now a good time to buy a home?

To answer this, we must examine the economic and global conditions that led to those historic lows and understand why the circumstances that drove those rates are unlikely to repeat anytime soon.(Source)

Why Mortgage Rates Fell Below 5% During the Pandemic

When reflecting on mortgage rates dropping below 5%, two significant factors come into play:

1. The Impact of the Global Pandemic

In early 2020, the COVID-19 pandemic brought the world to a standstill. Countries shut down borders, industries ground to a halt, and people faced unprecedented uncertainty about the future. To prevent a full-blown economic collapse, governments and central banks implemented aggressive monetary policies to stabilize financial markets and support their economies.

In the United States, the Federal Reserve slashed its benchmark interest rate to near zero, signaling to lenders that borrowing money should be cheaper. This led to record-low mortgage rates, as banks were able to access funds at lower costs and pass on the savings to consumers. The pandemic-induced financial crisis created a unique set of circumstances, driving rates lower than we had ever seen.

2. Nationwide Business Closures

Another key factor behind the historically low mortgage rates was the U.S. government’s decision to close non-essential businesses for a prolonged period. The economy was essentially paused, creating a domino effect of reduced spending, high unemployment, and deflationary pressures.

To stimulate the economy, the Federal Reserve engaged in quantitative easing, buying up mortgage-backed securities to inject liquidity into the financial system. This action significantly lowered the yield on these securities, which directly influences mortgage rates. The combination of a suppressed economy and aggressive intervention drove rates below 5%.

Current Market Conditions

To understand whether sub-5% mortgage rates are possible again, it’s essential to consider the current economic landscape. The conditions that pushed rates to historic lows during the pandemic are drastically different from where we are today.

1. Inflationary Pressures

One of the most significant hurdles to achieving lower mortgage rates is inflation. In the wake of the pandemic, the U.S. economy experienced rapid recovery and high demand for goods and services, outpacing supply. This surge led to inflation rates climbing to 40-year highs in 2022.

The Federal Reserve responded by raising interest rates aggressively to combat inflation. Higher federal funds rates have a direct impact on mortgage rates, making borrowing more expensive. For mortgage rates to fall below 5%, inflation would need to return to a more stable level, prompting the Fed to loosen monetary policy — a shift that is unlikely in the near term.

2. A Strong Job Market

Unlike the pandemic era, when unemployment spiked dramatically, the U.S. job market is currently robust. Low unemployment and rising wages contribute to increased consumer spending, which supports economic growth but also keeps inflation elevated. This dynamic makes it difficult for the Federal Reserve to justify lowering interest rates significantly.

3. High Demand for Housing

Another factor keeping mortgage rates elevated is the persistent demand for housing. While rising rates have cooled the market somewhat, the supply of homes remains tight, keeping prices high. Even if rates were to drop slightly, strong housing demand could prevent rates from falling below 5%.

What It Would Take for Mortgage Rates to Drop Below 5% Again

Given the economic realities of today, the chances of mortgage rates falling below 5% are slim without significant and unlikely changes to the broader economy. Here’s what would need to happen:

1. A Severe Economic Downturn

For mortgage rates to drop significantly, the Federal Reserve would need to cut its benchmark interest rate. This is only likely if the U.S. economy experiences a severe downturn, with high unemployment and reduced consumer spending. Such conditions would mirror the economic challenges of the early pandemic, creating downward pressure on rates.

However, no one is rooting for a recession just to secure lower mortgage rates. A downturn of this magnitude would come with significant financial pain for households and businesses alike.

2. Declining Inflation

A major drop in inflation would also help pave the way for lower mortgage rates. If the Fed achieves its target of 2% inflation and maintains it over an extended period, it may begin to reduce interest rates, potentially leading to lower mortgage rates.

That said, achieving and maintaining this level of inflation is no small feat, given current economic dynamics. Even if inflation moderates, it’s unlikely that we’ll see the kind of aggressive rate cuts needed to push mortgages below 5%.

3. Another Major Global Crisis

While no one hopes for a repeat of the pandemic, it’s worth noting that such an unprecedented event was a key driver of historically low rates. A global crisis of similar magnitude could potentially lead to another period of ultra-loose monetary policy.

However, even in a crisis, central banks may be more cautious about driving rates so low, given the long-term consequences of such policies.

Why Sub-5% Rates Are Unlikely

While it’s technically possible for mortgage rates to fall below 5% again, the conditions required to achieve this are both unlikely and undesirable. The pandemic was a once-in-a-century event that fundamentally reshaped the global economy. The low rates of 2020 and 2021 were an anomaly, not a new normal.

Today, the Federal Reserve is focused on balancing economic growth with controlling inflation, making aggressive rate cuts less likely. Additionally, a strong job market and resilient housing demand further limit the potential for significant rate declines.

What Homebuyers Should Do

For potential homebuyers hoping for rates to drop before making a move, it’s essential to adjust expectations. Instead of waiting for a return to sub-5% rates, buyers should focus on finding the best available rates today.

Strategies to consider include:

• Locking in rates when they dip slightly, rather than waiting for unrealistic lows.

• Exploring interest rate buydown programs, which allow borrowers to pay upfront to reduce their rate temporarily or permanently.

• Working with mortgage professionals to identify lenders offering competitive terms.

Final Thoughts

The era of sub-5% mortgage rates was a unique period driven by extraordinary circumstances. While it’s natural to hope for their return, the economic conditions that allowed such rates are unlikely to repeat. Instead of waiting for an uncertain future, homebuyers should focus on navigating today’s market with realistic expectations and smart strategies.