Interest rates have shown significant improvement, dropping by roughly 0.6% since their peak in mid-January. This decline offers hope for homeowners looking to refinance and prospective buyers entering the housing market. However, broader economic conditions remain uncertain, and multiple factors could influence where rates go next.
Bank Liquidity and Financial Stability
One of the most critical elements affecting interest rates is bank liquidity. As shown in the graph above, U.S. bank reserves have declined, approaching a “danger zone.” Banks hold fewer excess reserves, meaning lending conditions may tighten, impacting mortgage availability and rates. Additionally, a shift toward Treasury Bills (T-Bills) rather than excess cash reserves suggests financial institutions are preparing for possible economic turbulence.
Rising Defaults: A Growing Concern
Another red flag in the economy is the rise in loan delinquencies. The graph above illustrates that credit card and auto loan defaults are increasing, reflecting growing financial strain on consumers. Mortgage delinquencies remain low, but rising consumer debt struggles could spill over into the housing market, impacting demand and lending policies.
Unemployment Trends and Economic Weakness
Unemployment trends are another key driver of Federal Reserve policy. Historically, as unemployment rises, the Fed tends to adopt a more accommodative stance, which could lead to further rate cuts. While the job market remains stable, any significant shift in unemployment could accelerate rate reductions or introduce new economic risks.
Interest Rates and Market Movements
The Treasury market provides insight into where interest rates might be headed. The graph above tracks U.S. Treasury yields, showing recent declines that align with lower mortgage rates. As yields decrease, mortgage rates typically follow, presenting a potential opportunity for borrowers. However, resistance levels in Treasury yields could indicate volatility ahead, depending on economic data and Federal Reserve actions.
Looking Ahead:
While interest rates have improved, the future remains uncertain. Several factors will play a role in determining where rates go from here:
- Federal Reserve Policy – If economic weakness continues, the Fed may adjust rates further.
- Bank Liquidity – Financial institutions’ ability to lend will impact mortgage accessibility.
- Consumer Debt Stress – Higher defaults could affect credit availability and economic confidence.
- Unemployment Trends – A weakening job market may push policymakers toward further rate cuts.
- Global Economic Factors – Economic struggles outside the U.S. could also play a role in shaping domestic monetary policy.
What to Expect Moving Forward
While rates have improved, continued economic shifts will determine whether they fall further. If the economy weakens significantly, we could see the return of quantitative easing—a monetary policy tool used to inject liquidity into the market, which often leads to lower interest rates.
For homeowners considering refinancing 2025 could be the year we’ve been waiting for since rates shot up in 2022. We’ll continue to keep you updated on what’s happening and we’ll let you know when we hit your target interest rate. But please let us know if you’re not already on our watchlist. When rates fall, you’ll want to act fast so you don’t be stuck at the end of a long line of homeowner’s that have been waiting years to refinance.
Trevor Carlson
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
435-359-9000
trevor@heritagehl.com
Heritage NMLS #1497455
Trevor’s NMLS #: 267962
1060 South Main Street, Bldg. A Suite 101B, St George, Utah 84770