Key Takeaways
- While the Fed rate cuts don’t directly affect mortgage rates, changes to the federal funds rate and mortgage rates are both responses to related economic indicators.
- Mortgage rates are more closely tied to the 10-year Treasury bond yield, which can rise quickly as the economy heats up.
- Experts predict that mortgage rates will resume their downward trend, albeit at a modest pace.
One of the most enduring myths of the past year is that once the Federal Reserve lowers the federal funds rate, it will finally pierce the mortgage rate bubble.
When the Fed announced a 50-basis-point cut in September, that seemed to be working already. Thirty-year mortgage rates had been more or less steadily falling for weeks in anticipation of the FOMC meeting, until, one day earlier, they reached 5.89%, their lowest average in just over two years. Yet a funny thing happened on the way out of the generational housing crisis: the very next day, mortgage rates went up. And by 10 basis points, too.
Mortgage rates have not only stayed elevated but have reversed virtually all the declines that began in mid-summer, reaching as high as 6.73% in some states. So what happened?
Mortgage Rates Hit 2-Year Lows Sept. 17. Why Are They Up Now?
When the Fed issues its decision, it changes the federal funds rate, which is what banks charge other banks when lending them money in order to meet their overnight reserve requirements. The fed funds rate has a downstream impact on short-term debt products, like personal loans and credit cards, but its effect on mortgage rates is more ambiguous.
This helps to explain why mortgage rates were falling before Fed Chair Jerome Powell’s press conference—in effect, the lower rates were “priced in.” Instead of waiting on the advice of one regulatory body, lenders react to a constellation of other economic signals, which add up to “minor, temporary swings against the grain, based on the riskiness of lending to today’s mortgage market,” said Ryan Marshall, the CEO of Voxtur, a real estate technology company.
The timeline bears this out. A middling jobs report from the Bureau of Labor Statistics (BLS) can often precede mortgage rate hikes, as could be seen in the week following the Aug. 2 jobs report, as lenders braced themselves for the possibility of an economic downturn. Likewise, the inflation report from the same agency showing consistently low inflation, like the one released on Sept. 11, is often followed by lower mortgage rates, as was the case in the lead-up to the FOMC meeting.
In other words, that the Federal Reserve and mortgage lenders alike lowered their respective rates at roughly the same time was a case of correlation, not causation. They were responding to many of the same indicators.
Here’s where things get tricky. What happens when those indicators get a little too hot? For example, if the BLS were to release an unexpectedly strong jobs report, the Fed might decide the economy’s doing just fine and opt to lower rates by a smaller-than-hoped-for amount. But if the federal funds rate and the average mortgage rate are only tangentially related, then why would a lower rate cut cause mortgage rates to explode again?
The answer is related to the 10-year Treasury bond yield.
When the economy is humming along, investors typically sell off less-risky assets like bonds and buy riskier assets like stocks. The consequence of this is to reduce the price of those bonds on the market, which raises their yields. And banks and lenders use the yield of the 10-year Treasury as a benchmark to set mortgage rates, adding, in more conventional economic environments, about a percentage or two on top (though the spread has gotten as high as 2.5 percentage points this month).
On Oct. 4, the above scenario is exactly what happened. The BLS released its preliminary employment situation data for September, showing an increase of 254,000 jobs (nearly 100,000 more than were added in August). Then experts revised their Fed rate cut predictions to 25 basis points, which helped cause a bond selloff that sent the 10-year Treasury yield to over 4.00% when markets opened the following Monday. Unfortunately for would-be new homeowners, mortgage rates soon followed. This week, mortgage rates have consistently been over 2 percentage points higher than the 10-year Treasury yield.
The other factor in the rise of mortgage rates is simple supply and demand. Many homeowners don’t want to sell their homes because they lucked into a dirt-cheap, pre- or early-pandemic mortgage and rate. The difference against today’s rates would be unprofitable. At the same time, with rates remaining stubbornly high, fewer buyers are willing to take out a mortgage to purchase the properties that do make it to market. Lenders, with customers on either end of the negotiating table choosing to wait it out, may need to keep rates high to compensate for fewer mortgage applications.
“The recent uptick in mortgage rates despite a low in September can be attributed to various factors, including strong job growth and economic data that suggests resilience in the economy,” said Bob Driscoll, senior vice president and director of residential lending at Rockland Trust Company. “The interesting dynamic that we have seen here at RTC is certainly more customers being aware of the Fed cuts and choosing not to lock in their loans at today’s rates, betting they will see rates continue to drop during their application process.”
Where Are Mortgage Rates Headed in 2024 and 2025?
The most recent data from CME FedWatch predicts, with very high certainty, that the Fed will cut rates by 25 basis points at its next meeting in November. But as we’ve seen in the days and weeks following the last Fed cut, any impact on mortgage rates may already be baked in and more of a response to other signals from the economy.
“Just like all prognostications, no one has a crystal ball,” Driscoll said. “While we will see rates drop in 2025, we are not predicting a drop to historic lows but rather a modest drop in rates settling into a tight band with less volatility.”
Judy Zhou, a licensed real estate broker in New York, predicts that rates will have modest declines before reaching a plateau.
“It’s hard to know for sure,” Zhou said. “But experts are projecting a small further reduction in mortgage rates, with mortgage rates potentially stabilizing around the mid-5s.”
Still, it may be in your best interest to take out a mortgage when you can afford to do so, not when you believe the market will become more favorable.
“I do not typically advise borrowers to time mortgage rates,” Driscoll said. “If you find a home that you love and are in a financial position to buy it, don’t pass up that opportunity because you think rates may come down in three months.”