Why Are Mortgage Rates Up After the Fed Rate Cut?
Photo by Aditya Vyas on Unsplash
For months now, we’ve been eagerly awaiting the Fed to cut bank rates, and it finally happened. So why have mortgage rates been going up instead of coming down? Here’s what you need to know.
The Fed doesn't set mortgage rates. Powell controls the Fed rate, a.k.a. the Prime rate; this is the interest rate that financial institutions charge their most creditworthy customers for loans and credit accounts. It's a baseline that affects interest rates for many other financial products, including mortgages, credit cards, and small business loans, but those rates do not necessarily correlate directly to the Fed rate.
Mortgage rates are tied to the yield on the 10-year treasury. When the yield goes up, mortgage rates go up. When the yield drops, the rates drop. Robust economic data and deficit worries are among the factors behind the recent rise in the 10-year Treasury yield. Traders are also growing concerned that central bank policymakers may be less inclined to reduce rates, even after the Fed had forecasted another 50 basis points (BPS) of trimming before the year end at the September meeting. Lenders set rates based on anticipation of where the rates are heading after reviewing current economic data. Even a robust economy, with a strong job market and inflation trending down, doesn't appear to support the case for a rate cut at the next Fed meeting.
Where mortgage rates go from here: Many forecasts have rates near 6% at the end of this year and falling to about 5.8% next year. If we are lucky maybe we get to 5.5%. It is important to remember that in the broader historic view, this is well within normal for mortgage rates; the sub-3% rates of a few years back were anomalous in the extreme.
What to do now? Is it better to wait for mortgage rates to fall, or start looking now? Experts advise against trying to time the market — including when it comes to buying a home. That's for two reasons. First, if you buy a home and then mortgage rates do fall, you can refinance your mortgage and take advantage of the lower rate. Second, if you wait and rates go up, it just gets harder to afford a home.
How's the housing market looking? The number of homes for sale in September was 6.4% higher than a month earlier and 33.6% above a year ago. The median home price has risen about 50% over the last 5 years.
Despite a Federal Reserve interest rate cut, mortgage rates have unexpectedly risen, complicating the home-buying landscape. While rates are still lower than last year, experts predict stabilization around 6%, with some potential for fluctuation. Increased inventory and slowing market dynamics offer buyers a better chance, but high home prices remain a significant challenge. Buyers are advised against waiting for ideal rates, buy now and refinance later.
Courtesy of Risha Kilaru of OriginPoint, Compass’ preferred lending partner.