How Far, How Fast: Are 1% Mortgages Really Coming?

Where the 1% Prediction Comes From

The 1% mortgage prediction circulates on social media primarily among people who bought homes in 2020 or 2021 and are anchoring on those rates as the baseline. The logic goes: rates fell from 5% to 3% in 2020, so they could fall from 7% to 1% again. This reasoning misunderstands why rates fell in 2020.

The Federal Reserve's response to the COVID-19 pandemic included purchasing mortgage-backed securities at an unprecedented scale — effectively subsidizing mortgage rates below where the market would have set them. When the Fed stopped buying and began reducing its balance sheet, rates rose back toward market levels. The 3% rates were not a market outcome; they were a policy outcome.

How Mortgage Rates Are Actually Set

Mortgage rates are primarily driven by the yield on the 10-year Treasury note plus a spread that reflects the additional risk of mortgage lending. Historically, the spread between the 10-year Treasury and the 30-year fixed mortgage rate has averaged around 1.7 to 2.0 percentage points. When the spread widens (as it did in 2022 and 2023), mortgage rates rise faster than Treasury yields. When the spread normalizes, mortgage rates fall even without a change in Treasury yields.

For mortgage rates to reach 1%, the 10-year Treasury would need to be near zero — which would require either a severe deflationary recession or another extraordinary Fed intervention. Neither is a base case scenario.

What a Realistic Rate Decline Looks Like

A more realistic scenario for rate improvement is a gradual decline toward the 5% to 6% range as inflation continues to moderate and the Fed reduces its policy rate. This would represent meaningful improvement from current levels and would improve affordability for buyers — but it would not produce the dramatic payment reductions that 1% or 2% rates would imply.

The practical implication for buyers: if you are waiting for rates to fall to 3% before buying, you may be waiting for a long time. If you are waiting for rates to fall to 5% or 6%, that is a more plausible scenario — but it is still a bet on timing, and the market does not wait for you to be ready.

The Buy Now, Refinance Later Strategy

For buyers who are financially ready but concerned about current rates, the "buy now, refinance later" approach is worth considering. You buy at current market rates, and if rates fall meaningfully in the next few years, you refinance. The risk is that rates do not fall — but the cost of waiting (continued rent payments, potential price appreciation, missed builder incentives) is also real.

The decision should be based on your specific financial situation, time horizon, and the specific property and market you are targeting — not on a prediction about where rates will be in two or three years.