Mortgage rates rose to 7% on Thursday for the first time since May 2024, adding another drag to an already tough housing market.

Even though the Federal Reserve has cut interest rates by a full percentage point in recent months, mortgage rates are still climbing — raising hopes among homebuyers that the cost of financing a home may fall.

But instead, mortgage rates rose. What to give? What does this tell us about our housing market prospects this year?

Here are three things to know about mortgage rates and the housing market.

Why are mortgage rates still rising even as the Fed cuts rates?

To answer this question, it's best to remember that the Federal Reserve can influence mortgage rates, but it does not determine them.

Simply put, the Fed sets short-term interest rates, but mortgage rates mostly follow a different number: the 10-year Treasury note yield.

That yield has risen sharply in recent months for a number of reasons. Inflation has remained high, which means the Fed may be more cautious in cutting interest rates further.

And the economy is strong. That means the Fed could wait longer to cut interest rates, especially since a stronger economy could also lead to higher inflation.

It's also worth remembering that while 7% may feel high since mortgage rates have dropped to 2.65% in early 2021, it's not that high from a historical perspective.

In fact, these mortgage rates frequently reached 6% or 7%, sometimes even higher, in the 1990s and early 2000s, and reached double digits in the 1970s and 1980s.

But that may be little comfort to homebuyers who have become accustomed to low mortgage rates in recent years, especially when home prices have risen so much. The median sales price of existing homes has increased by 50% over the past five years.

So where will mortgage rates go?

This is difficult to answer because mortgage rates are affected by many factors.

But experts generally agree on one thing: They are unlikely to return to the low levels of just a few years ago.

"They should reject some," said Sam Hart, chief economist at Freddie Mac. "But I think in a world of strong economic growth and stable inflation, the new normal is 6% to 7%."

At the moment, it's difficult to see bond yields falling significantly. The Federal Reserve is expected to cut interest rates only twice more this year, which could send bond yields higher. That means mortgage rates are likely to remain high as well, which is bad news for homebuyers.

What is the outlook for the real estate market in the coming year?

High mortgage rates will create some additional headwinds for the housing market as it looks to recover from a tough year.

Final totals have yet to be announced, but are expected in 2024 Fewest existing home sales since 1995. In addition to rising mortgage rates, there are several factors contributing to slow sales. Low inventory and a surge in home buying during the pandemic have also had an impact.

Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in a statement that "rising mortgage rates ... are dampening homebuyer demand." He said home buying Mortgage application volumes are down 2% from a year ago.

But Freddie Mac's Carter said he expects the housing market to be good.

"As the economy is strong, house prices and the housing market will be able to withstand a higher interest rate environment," he said.

Carter believes there are some households who won't necessarily be deterred by high mortgage rates, including many first-time homebuyers.

"There's a large segment of renters who are affluent enough and in their thirties and early forties who want to buy a home, so I think there's a lot of latent demand waiting to join the market," he said. "

So what does this mean for homebuyers?

Well, this is hard, but there are a few things. One is to shop around with different mortgage lenders to see who can offer you the best rate. Talking to multiple lenders does make a difference - and of course, a lower mortgage rate means a lower monthly payment.

Second, if you're frustrated by your affordability, you may want to broaden your search and consider different neighborhoods or locations in your metro area.

Prices can vary significantly, so if you feel like you're on the outs, it might be worth broadening your search.