The Fed just dashed hopes for lower mortgage rates. What homebuyers need to know.

If you expected lower mortgage rates to make buying a home slightly cheaper this spring, consider your hopes dashed, experts say.

The Federal Reserve put a hold on interest rate cuts last week and tweaked plans for its balance sheet, actions that may not raise mortgage rates significantly, but will likely keep them elevated, analysts say.

“It does seem like mortgage rates are going to stay where they are for the foreseeable future,” said Eric Orenstein, senior director of nonbank financial institutions at research firm Fitch Ratings.

The current rate for a 30-year fixed mortgage is 7.55%. While that's down from a recent peak of 8% in October 2023, it's far above the 3% range that preceded the Fed's rate-hiking campaign from 2022 to 2023, which lifted the cost of borrowing for consumers and businesses to curb high inflation.

For people who sat out 2023 hoping for a better market this year, purchasing a home this spring will be more like deja vu instead, with expensive homes and high mortgage rates similar to last year.

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How have expectations for mortgage rates changed this year?

Most analysts see mortgage rates hovering at elevated levels of between 6.5% and low-7% through the rest of the year. That range is higher than some predicted earlier this year.

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 Here’s a rundown of how some forecasts have evolved:

• Fannie Mae forecasts the average 30-year fixed rate to drop to 6.4% by year-end, up from predictions of 5.9% in February.
• The Mortgage Bankers Association now predicts mortgage rates at 6.4% at year-end, up from its 6.1% forecast in January.
• The National Association of Realtors expects rates to average 7.1% this spring before settling at 6.5% by year-end. At the start of the year, NAR had predicted 6.3% at year-end.
• Wells Fargo sees a rate of 6.5% at year-end, up from its January forecast of 6.05%.

To illustrate how the change in outlooks could affect your pocketbook, take a $240,000 loan.

At Fannie Mae's earlier forecast of 5.9% for a 30-year mortgage, your monthly payment would be $1,421. But with its raised forecast of 6.4%, you'd pay $1,501.

Why have mortgage rate forecasts risen?

With inflation picking up again, the Fed is holding off on rate cuts, which can re-ignite an escalation in prices. Coming into the year, many people expected as many as six or seven rate cuts in 2024, which was then scaled back to two or three. Now, some economists are forecasting one or none.

The Fed is making another move that impacts interest rates. To drain money from the banking system and allow rates to drift higher, the central bank has been allowing debt it bought during the pandemic to roll off its balance sheet, or mature, without replacing it.

Beginning June 1, the Fed said it is lowering its monthly cap on Treasury roll-offs to $25 billion from $60 billion. It will still cap the roll-off of mortgage-backed securities (MBS) at $35 billion per month but if there’s more than that, it will buy Treasuries instead of MBS.

MBS are mortgage bundles that trade and act like a bond and pay interest to the holder. These bundles mature when homeowners pay in full the mortgages in the pool. They can mature faster if homeowners pay off mortgages early, such as when a home is sold or when a mortgage is refinanced with a new loan.

How could the Fed’s MBS change affect mortgage rates?       

The Fed’s MBS holdings could drop quicker if there’s a significant acceleration in prepayments, said Bill Adams, Comerica Bank chief economist.

Higher rates here to stay:Current 30-year mortgage rate is highest in over two decades: What that means for buyers

And if the Fed uses excess payments to buy Treasuries instead of MBS, the MBS market loses a big buyer, which could hurt demand and prices. When debt prices drop, yields rise.

“In the near-term, the biggest driver of MBS maturities will be existing home sales," Comerica's Adams said. "When a homeowner sells, they pre-pay their mortgage, and that prepayment funds a prepayment of the MBS that financed the mortgage.”

That would lead to a faster run-off of the Fed’s MBS holdings and push up mortgage interest rates, he said.

Is it likely home sales will increase that much?

So far, the MBS roll-off has lagged the Fed’s $35 billion cap because of the slower housing market. They’ve been hovering at $15 billion per month, Fed Chair Jerome Powell said after the Fed’s policy meeting last week.

But if sales accelerate in the spring-summer buying season, homebuyers could see an uptick in mortgage rates. The more likely scenario, though, is that mortgage rates just won’t drop, financial and real estate experts said.

“Lower mortgage rates continue to feel more out of reach in this perfect storm of persistent inflation, rising treasury yields, and the Fed’s continued run-off of its MBS holdings,” Orenstein said.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.