Mortgage Rates -If the Fed cuts rates, why have they been going up?

Many expected mortgage rates to fall after the Federal Reserve’s recent interest rate cuts. However, instead of dropping, mortgage rates have been on the rise. Homebuyers who were hoping for lower rates may be confused by this trend. To understand why mortgage rates have climbed, let’s dive into how they are determined.

Why Don’t Fed Rate Cuts Directly Lower Mortgage Rates?

One of the most common misconceptions is that when the Federal Reserve cuts interest rates, mortgage rates will immediately follow suit. While the Fed’s rate cuts affect short-term loans, credit cards, and personal loans, mortgage rates are influenced by other factors—mainly the 10-year Treasury bond yield. When the Fed cut interest rates in September, mortgage rates did fall briefly. But soon after, they began to rise again, leaving many to wonder why.

The Role of the 10-Year Treasury Bond Yield

Mortgage rates are closely tied to the yield on 10-year Treasury bonds. When the economy shows signs of strength—such as strong job growth or solid economic data—investors move their money from safer assets like bonds to riskier ones like stocks. This shift causes bond prices to drop and yields to rise. Since mortgage lenders use the 10-year Treasury yield as a benchmark, when yields go up, mortgage rates tend to follow.

For example, when the September employment report showed that the U.S. economy added 254,000 jobs, far exceeding expectations, bond investors reacted by selling off bonds. This caused the 10-year Treasury yield to spike above 4%, which in turn led to an increase in mortgage rates. As a result, the average 30-year fixed mortgage rate climbed to over 6.4%, erasing the earlier declines that had homebuyers hopeful.

Lender Pricing and Market Conditions

Another reason mortgage rates are rising is that lenders adjust their pricing based on market conditions. Even if the Fed cuts rates, lenders still need to cover their costs, manage risk, and make a profit. In a housing market where supply is low and home prices remain high, lenders may set higher rates to account for fewer applications or to compensate for increased risk.

Additionally, many homeowners with pre-pandemic mortgages secured at historically low rates are reluctant to sell, keeping housing inventory limited. This creates less motivation for lenders to lower rates, as the housing market faces slower activity on both the buyer and seller sides.

What to Expect for Mortgage Rates in 2024 and Beyond

So, where are mortgage rates headed? While it’s impossible to predict with certainty, experts suggest that rates may not drop significantly in the near future.

According to real estate professionals, mortgage rates could settle into the mid-5% range by 2025, but they are unlikely to return to the historically low levels seen in 2021, when rates dipped below 3%. Lawrence Yun, Chief Economist for the National Association of Realtors, predicts that mortgage rates will likely stabilize around 5.5% to 6% in the next year, depending on economic data and Fed actions.

Should You Wait to Buy?

For potential homebuyers, the fluctuating mortgage rate environment creates a dilemma: Should you wait for lower rates, or should you lock in a rate and buy now?

Experts generally advise against trying to “time” the mortgage market. If you find a home that fits your needs and your financial situation allows for it, waiting for a rate drop could backfire. If rates do fall later, you can always refinance. However, if rates go up, affordability becomes more of a challenge.

Judy Zhou, a licensed real estate broker, echoes this sentiment, saying, “It’s hard to know for sure where rates will go, but locking in when you’re financially ready is often the best approach.” With home prices still elevated and the supply of homes limited, waiting for both lower rates and lower prices could mean missing out on opportunities.

Conclusion: The Mortgage Rate Puzzle

The rise in mortgage rates, despite recent Fed cuts, reflects the complex interaction of market forces, economic signals, and investor behavior. While the Fed can influence interest rates, it doesn’t directly control mortgage rates. The bond market, lender decisions, and broader economic conditions all play a role in shaping what homebuyers will pay for their loans.

As we look ahead, it’s clear that the days of 3% or 4% mortgage rates are behind us, and a “new normal” of rates around 5.5% to 6% is more likely. For those planning to buy a home, the best strategy may be to act when the timing is right for you—rather than waiting on unpredictable rate changes.