The Fed cut interest rates by 0.25% last week. However, prospective homebuyers who were hoping for lower mortgage rates are likely to be disappointed.
Central banks influence mortgage rates, but they do not directly set them.
In fact, mortgage rates continue to rise for the sixth week. This is despite the Fed cutting interest rates by an even larger 0.5% in September. According to data obtained from Bankrate, today's average interest rate on a 30-year fixed mortgage is 6.88%. Interest rates have increased by nearly 0.75% since early October. This extreme rise is primarily due to a series of strong economic indicators and uncertainty surrounding last week's election.
Logan Mohtashami, principal analyst at HousingWire, said investors' hopes for a Donald Trump victory in particular have spurred bets on a shift in economic policy that could widen deficits and inflation. Bond yields and mortgage rates had risen significantly even before the election results were finalized.
Experts said the Fed's series of interest rate cuts and weak economic indicators still point to a long-term trend toward lower mortgage borrowing rates. But the question now is whether recent data and the incoming government's economic plans will influence the central bank's future decisions.
Homeowners looking to buy or refinance need to be patient. Recent volatility aside, there tends to be a disconnect between when central banks start cutting interest rates and when mortgage rates start falling consistently.
Will there be any volatility in the mortgage market after the election?
It seems counterintuitive that mortgage rates rose this much last month, given the Fed's decision to begin cutting rates. Many expected mortgage rates to move in the same direction as the Fed's benchmark rate. However, mortgage rates also respond to the interaction of economic factors such as inflation, labor statistics, investor expectations, geopolitical events, and changes in the bond market.
Economic data after the Fed's September interest rate cut was unexpectedly strong, with labor data showing a strong economy. This has changed investors' outlook on the pace of future rate cuts. Robust job creation could accelerate inflation (to which mortgage rates are very sensitive) and could prevent the Fed from cutting rates significantly next year.
Pre-election anxiety was also swirling in financial markets. Political instability can cause investor panic, which can result in increased volatility in bond yields and mortgage rates. Jacob Channell, senior economist at Lending Tree, said investor anxiety before the election increased demand for bonds and pushed yields higher. “If the 10-year Treasury yield rises, mortgage interest rates will also rise.”
However, investors tend to overreact and often act defensively to “price in” the extreme values of certain economic data points or events. Colin Robertson, founder of the housing market site The Truth About Mortgage, said that in anticipation of a Trump victory, bond markets were already bracing for increased inflationary pressures as a result of the election. Robertson expects there will be some degree of rate easing, although not a dramatic cut, as the market raised interest rates before the election.
There remains a lot of uncertainty surrounding future economic data and the Fed's next steps. Beth Ann Bobino, chief economist at U.S. Bank, said recent fluctuations in bond yields and mortgage rates will likely subside to some extent as the election dust settles. “However, uncertainty around data flows and the Fed's future actions will continue for some time,” Bovino said.
How will future Fed rate cuts affect mortgage rates?
Inflation and labor data are barometers of the economy's health and influence the Fed's decisions to raise or lower interest rates.
Since early 2022, the central bank has focused on curbing inflation by implementing a series of aggressive interest rate hikes. Now that inflation has cooled and the labor market has weakened, the Fed has cut interest rates to avoid a job-loss recession. However, it is also wary of easing interest rates too quickly, which would only cause inflation to heat up again.
Although the Fed does not directly control the mortgage market, its monetary policy influences the general direction of mortgage lenders and borrowing rates. Every time the Fed lowers interest rates, it lowers borrowing costs for banks and allows them to lower interest rates on consumer loans, including mortgages.
💡What does the Federal Reserve do?
The Fed has two main goals: maintaining maximum employment and controlling inflation. No single data point is conclusive, but when inflation is high, the Fed generally raises interest rates to suppress demand. When unemployment is high, the Fed often lowers interest rates to stimulate consumer activity.
The Fed has cut interest rates twice so far this year. A summary of economic forecasts suggests another 0.25% rate cut could occur at the Fed's last policy meeting of 2024 on Dec. 18. But nothing is guaranteed. In his post-meeting remarks, Fed Chairman Jerome Powell left open the possibility of a pause in rate cuts in December, citing better-than-expected economic data after September's big rate cut.
“We need to see where the data takes us,” Powell said.
Nicole Ruth, senior vice president at Ruth Team Powered by Movement Mortgage, said she could see a third rate cut if economic indicators such as higher inflation and lower unemployment are released that are better than market expectations. He said the likelihood of a decline in interest rates would continue to put upward pressure on mortgage rates.
What is the long-term forecast for mortgage rates?
Most housing market forecasts suggest that mortgage rates will fall in the final three months of 2024 and continue to fall throughout next year. But when it comes to the mortgage market, no one has a crystal ball. All predictions are estimates at best.
What we do know is that mortgage rates often rise quickly, but fall painfully slowly. For example, it takes several weak economic reports for mortgage rates to fall, but it only takes one strong piece of data for rates to rise.
Interest rates will need to fall decisively to meet forecasters' expectations that the average 30-year fixed mortgage rate will be around 6% by the end of the year. Barring weak inflation and labor data and another Fed rate cut in December, that won't happen. Looking further ahead, experts say interest rates could fall to the mid-5% range by the second half of 2025. But again, it all depends on future economic data, investor expectations, and the pace of future Fed rate cuts.
Let's take a closer look at how some major housing authorities are predicting what mortgage rates will be this year and next.
What else is happening in the housing market?
Today's affordable housing market is driven by high mortgage rates, a long-term housing shortage, rising home prices, and a decline in purchasing power due to inflation.
🏠 Low Housing Inventory: A balanced housing market typically has 5-6 months of supply. The average in most markets today is about half that. Despite a surge in new construction in 2022, there is still a shortage of about 4.5 million homes, according to Zillow.
🏠 Rising Mortgage Rates: At the beginning of 2022, mortgage rates were near historic lows of around 3%. When inflation skyrocketed and the Fed began raising interest rates to rein in inflation, mortgage rates nearly doubled within a year. In 2024, mortgage rates will still remain high, effectively pricing out millions of prospective buyers from the housing market. As a result, home sales are slowing even during spring and early summer, which are typically busy periods for homebuying.
🏠 Interest rate lock-in effect: The majority of homeowners have mortgage rates fixed at 6% or less, and some have mortgage rates as high as 2% or 3%, making it difficult to sell their current home. reluctant to do so. Significantly higher mortgage interest rates. Until mortgage rates fall below 6%, homeowners will have little incentive to put their homes on the market, leading to a shortage of resale inventory.
🏠 Soaring housing prices: Although demand for housing purchases has been limited in recent years, housing prices remain high due to inventory shortages. The median U.S. home price in September was $427,989, up 3.9% on an annual basis, according to Redfin.
🏠 Rapid Inflation: Inflation increases the cost of basic goods and services, reducing our purchasing power. It also affects mortgage interest rates. When inflation is high, financial institutions typically set interest rates on consumer loans to compensate for the loss of purchasing power and preserve profits.
Expert advice for home buyers
It's never a good idea to rush into buying a home without knowing how much you can afford, so make sure you have a clear home purchase budget. We also note that lower mortgage rates are likely to increase interest in buying homes overall, which could push up home prices and make them unaffordable for some time. worth it.
“As mortgage rates fall, the housing market could become even more competitive for homebuyers,” said Daniel Hale, chief economist at Realtor.com.
Here's what experts recommend before buying a home.
💰 Build your credit score. Your credit score is one of the main factors lenders consider when determining whether you qualify for a mortgage and at what interest rate. Aiming for a credit score of 740 or higher can help you qualify for lower interest rates.
💰 Save money by making a bigger down payment. If you have a larger down payment, you can get a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate the need for private mortgage insurance.
💰 Shop around for mortgage lenders. Comparing loan offers from multiple mortgage companies can help you negotiate a better interest rate. Experts recommend getting at least two to three loan quotes from different lenders before making a decision.
💰 Consider the relationship between renting and buying. Choosing whether to rent or buy a home is about more than just comparing monthly rent and mortgage payments. Renting offers flexibility and lower initial costs, while buying allows you to build wealth and have more control over your housing costs. The best choice will depend on your financial situation, lifestyle, and how long you plan to stay in the same place.
💰 Consider mortgage points. One way to lower your mortgage interest rate is to use mortgage points to buy down your mortgage. One mortgage point equals a 0.25% decrease in your mortgage interest rate. Each point typically costs 1 percent of the total loan amount.
