Mortgage rates have slightly dropped. Here's how they could fall further.

After being the highest they've been since 2000, mortgage interest rates fell recently for the biggest single-week drop since July 2022. That drop, however, was marginal, bringing today's mortgage rates down 25 basis points to 7.61%. Still, any drop in today's high-rate climate is welcome news for homebuyers and those owners looking to refinance.

"Last week's decrease in rates was driven by the U.S. Treasury's issuance update, the Fed striking a dovish tone in the November FOMC statement, and data indicating a slower job market," Joel Kan, the Mortgage Bankers Association (MBA) Vice President and Deputy Chief Economist said in a statement. "Applications for both purchase and refinance loans were up over the week but remained at low levels. The purchase index is still more than 20 percent behind last year's pace, as many homebuyers remain on the sidelines until more for-sale inventory becomes available."

While any mortgage rate drop is positive for buyers, there's still a long way to go to get them into a more manageable range. The 3% rates from 2020 and 2021 are likely to not return anytime soon, but that doesn't mean, however, they still can't come down significantly from where they are now. In fact, there are multiple scenarios in which mortgage rates could drop further in the weeks and months to come.

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How mortgage rates could drop further

Here are three scenarios in which buyers could see a drop in mortgage rates.

Rates could remain paused

It's not a coincidence that mortgage interest rates only recently dropped, even if that decrease was minimal. It came on the heels of the Federal Reserve announcing a pause in interest rate hikes. Their decision to leave rates untouched in their October 31 — November 1 meeting came after they made the same decision after their September meeting. 

With one more meeting for 2023 on the books for December, it's certainly possible that they'll keep rates the same once again. If that pause comes to pass, then the potential for another rate drop is strong, although it may not be as substantive as it could be if the Fed cut the benchmark rate.

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The Fed cut could cut the benchmark rate

The biggest factor in play is the benchmark interest rate. Or, more specifically, what the Fed will do with that range. It's already at a 22-year high at a range between 5.25% and 5.50%. So any cut there will pay dividends for both homebuyers and owners looking to refinance. 

That said, it took about 18 months and multiple rate increases to get to today's range, and it's highly unlikely that the quick pace of increases will match a similarly quick pace of decreases. Still, any cut to the benchmark interest rate — for any reason — will inevitably lead to a reduction in mortgage rates. And the more the benchmark rate is cut, the further mortgage interest rates will fall.

Inflation could cool

The above factors are all in combination with one another, but they're both closely tied to the larger battle against inflation. While inflation remains at 3.7% (a new report is due next week), that's still significantly higher than the 2% goal the Fed has said they're pursuing. 

Still, inflation is significantly lower than what it was in 2022, so the efforts are working. If they continue to work and inflation levels off to where the Fed wants it, rate drops are inevitable. There are already talks of two rate decreases in 2024 if this were to happen.

The bottom line

Today's mortgage rate environment is no one's idea of a bargain, particularly when compared to the rate environment of the recent past. However, if the recent rate drop is an omen for the future, homebuyers could be in for some additional relief soon. This could happen as soon as December if the Fed continues to keep rates paused. But it could drop if and when they cut the benchmark rate, which is likely to happen if inflation finally cools to a level officials are comfortable with.

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