The Federal Reserve cutting its key benchmark rate does not lock in a downward trajectory for mortgage rates, Goldman Sachs (GS) economists said, projecting mortgage rates to stay higher for longer until the end of next year.

GS economists led by Jan Hatzius expect mortgage rates to start falling to just 6.1% at the end of 2025, they said in a research note Monday. That projection stems partially from technical factors. Also, mortgage rates will “not necessarily” decline as the Federal Open Market Committee lowers the fed funds rate, Hatzius said.

Current mortgage rates already reflect the bond market’s expectation of several Fed cuts in 2024 and in 2025, GS said. “Instead, what matters more is how much the FOMC actually eases relative to what is expected, and our own expectation for six 25bp cuts over the next year does not differ substantially from current market-implied expectations,” Hatzius said.

The Fed made its first easing step in September with its half-point cut to 4.75%-5%.

The benchmark 30-year fixed-mortgage rate was 6.54% as of October 24, Freddie Mac said last week, up from a four-week average of 6.36%. Freddie Mac said continued economic strength drove mortgage rates higher once again last week. Here's a Freddie Mac chart on 2024 mortgage rates:

Technical factors driving GS's view include lower rates volatility and renewed demand for mortgage-backed securities from commercial banks that should narrow the spread between risk-free rates and mortgage rates.

Goldman said housing turnover will be impacted the most by sustainably higher mortgage rates, and it foresees lower existing home sales in the coming months. Many homeowners with mortgages will not be motivated to sell, as 85% of borrowers have interest rates below current market rates, it said. Meanwhile, almost 70% have rates 2 percentage points that are below market rates.

“As a result, we expect existing home sales to rebound to just 4.1M in 2025, 23% below 2019 levels and only modestly above this year’s 4.0M,” Hatzius said.

In the markets, the S&P 500 Real Estate Sector has risen nearly 10% this year, and the S&P 500 Residential REITs group was up nearly 16%.

The Real Estate Select Sector SPDR ETF (NYSEARCA:XLRE) has picked up ~11% this year, and the S&P 500 (SP500)(SPY)(VOO) has advanced 22% YTD. Other real estate ETFs include (VNQ), (IYR), and (HOMZ).