High mortgage interest rates were like a bucket of ice water dumped on the sizzling-hot housing market last year. Buyers could no longer afford to buy. So builders stopped building, sellers stopped selling, and the housing market froze.

However, mortgage rates are now coming down. And the slowdown in inflation could enable them to fall even further—perhaps even below 6%.

Mortgage rates averaged 6.33% for 30-year fixed loans in the week ending Jan. 12, according to Freddie Mac. Meanwhile, Mortgage News Daily, which reports average rates for the day instead of a whole week, had them at 6.07% as of Thursday afternoon. That’s quite a difference from when rates topped 7% just two months earlier.

The typical monthly mortgage payment is now below $2,000, a psychological milestone for many cash-strapped homebuyers.

“Let’s celebrate some good news. List prices are down, mortgage rates are down,” says Realtor.com® Senior Economist George Ratiu. “With inflation showing a tangible slowdown, I do expect mortgage rates to follow suit in the months ahead. The question is when.”

Mortgage rates have been rising as a result of the U.S. Federal Reserve hiking its own short-term interest rates to combat inflation. The Fed’s actions appear to be working: Inflation stood at 6.5% in December. While still high, it’s coming down from 7.1% year over year in November and well below the 9.1% peak in June. This could cause the Fed to ease up on its rate hikes, which could result in mortgage rates coming down.

“We are seeing the effects on demand in the most interest-sensitive sectors of the economy, such as housing,” Federal Reserve Chair Jerome Powell said at a press conference after the Fed’s Dec. 14, 2022, meeting.

While the Fed’s rates and mortgage rates are different, they have been moving in the same direction. So when the Fed jacks up rates, mortgage rates typically follow. They more than doubled last year and are up from the mid-3% range just one year ago. The increases have made monthly housing payments so much more expensive, pricing many buyers out of homeownership.

“If inflation continues to fall at the current pace, we could possibly see mortgage rates under 6% by the tail end of February,” says Ratiu. He expects they will remain in the 6% to 7% range for the next few weeks until it becomes clear that inflation is definitively on the way down.

In the meantime, buyers are getting a bit of a break. Median home list prices dropped to $400,000 in December, down from a peak of $449,000 in June, according to Realtor.com. Prices were up 8.4% annually, but this was the first month in a year where price growth was only in the single digits.

“The decline in price from their summer peaks, combined with sliding mortgage rates, is lowering mortgage payments and boosting purchasing power for buyers,” says Ratiu.

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