Analysis
How We Got Here – Why Mortgage Rates Probably Aren’t Going Back to 3%
A lot of homebuyers are stuck in the same holding pattern: waiting for mortgage rates to drop back down to where they were in 2020 and 2021. Some buyers who purchased more recently with a temporary 2-1 rate buydown did so assuming they’d be able to refinance into something similar before long. It’s an understandable hope — but it’s worth looking at the actual data before building a plan around it.
Rates Aren’t as “High” as They Feel
Pull up a chart of the average 30-year fixed mortgage rate going back to the early 1970s, and today’s rate — hovering around 6.5% — doesn’t look unusual at all. It actually falls right in the range where rates have spent most of the last five decades. What looks abnormal, historically speaking, is the stretch of 2%–3% rates we saw a few years ago. It’s worth asking honestly: which one looks like the anomaly, and which one looks like the norm?
That doesn’t mean 6.5% is where anyone wants rates to stay forever. But the realistic goalpost isn’t “back to 3%” — it’s more likely a gradual move into the 5% range, and there’s a clear, data-driven reason why.
Mortgage Rates Follow Inflation — Not the Fed
One of the most common misconceptions is that the Federal Reserve’s rate decisions directly set mortgage rates. They don’t. The Fed funds rate and mortgage rates are two different things, and historically they don’t move in lockstep at all.
What actually drives mortgage rates, going back to the 1970s, is inflation. Overlay a chart of inflation against average mortgage rates and the correlation is hard to miss: when inflation spikes, mortgage rates climb; when inflation cools, rates eventually follow it back down. The Fed isn’t setting that trend — it’s reacting to it. By its own admission, the Fed is “data dependent,” meaning it’s watching the same inflation and economic data everyone else is and adjusting after the fact.
If anything, what the Fed says in its meeting minutes and press conferences — its read on where the economy is heading — tends to matter more to markets than the funds rate move itself. The funds rate has jumped around quite a bit over the decades, including moving very late relative to events like the 2020 downturn, while mortgage rates have tracked much more closely with the 10-year Treasury yield and with inflation itself.
What Actually Produced 3% Rates
Understanding how we got to sub-3% mortgage rates in 2020–2021 explains why that environment is unlikely to repeat anytime soon — and honestly, why we shouldn’t want it to.
A few things lined up at once:
Inflation was already historically low heading into 2020 — under 2%, and closer to 1% for years before that — which had been quietly pulling mortgage rates down for a long time. Then COVID hit, and the resulting lockdowns triggered a sharp, artificial recession. It wasn’t a typical economic slowdown; it was a sudden stop caused by policy decisions, not organic economic weakness.
On top of that, the Federal Reserve stepped in as a major buyer of mortgage-backed securities — the financial product that actually funds mortgages. Normally, investors buy these securities looking for a return, and rates adjust based on that supply and demand. But the Fed wasn’t a typical, return-focused investor. It was a massive buyer with essentially unlimited appetite and no concern for yield, and that kind of demand pushes rates down in a way the market wouldn’t produce on its own.
Historically low inflation, a sudden recession, and an outsized, non-market buyer in the mortgage-backed securities market all happening together is what produced 3% mortgages. That’s a very specific — and not particularly healthy — combination of circumstances, not a normal market outcome.
So What’s a Realistic Target?
As a rough rule of thumb, mortgage rates have tended to run about four points above the inflation rate. Inflation today is sitting around 2.5%–3%, and average mortgage rates are running roughly 6%–6.75%. That math checks out.
For rates to meaningfully improve from here, inflation needs to keep cooling — ideally back toward 2% or below. If that happens, a mortgage rate somewhere in the 5% range is a realistic, achievable goal. That’s the number worth watching for, not 3%.
Common questions
Are there other factors to look for?
Economic Reports. Gross Domestic Product and jobs reports also have an affect on mortgage rates. Typically when reports are weak rates will tick down, when the economy is strong rates will hold or tick upward. But the overall trend will always pace with the inflation rate.
I hear mortgage spreads quite a bit, what is that?
It’s the difference between the average mortgage rate and the 10 year treasury yield. Usually the average mortgage rate is 1.75-2% higher than the 10 year treasury yield. It has been closer together and further apart before but it averages just under 2%.
What is a Good Strategy?
Don’t overthink it. If you are ready, willing, and able, go ahead and buy the house. You want to focus on what your needs are or what you feel comfortable with. If rates go down in the future and it makes sense to refinance, or move into a more expensive home, then that is a bonus.
The Takeaway
If you’re sitting on the sidelines waiting for rates to fall back to where they were in 2021, it’s worth reconsidering the premise. Those rates weren’t a “normal low” — they were the product of a once-in-a-generation combination of a pandemic-driven recession and direct Fed intervention in the mortgage market. Betting on a repeat of that specific scenario isn’t a strategy; it’s a long shot.
A more grounded approach is to watch the data that actually moves mortgage rates: inflation trends, the 10-year Treasury yield, and what the Fed is signaling about where the economy is headed — rather than holding out for a rate environment that was the exception, not the rule.