The recent interest rate cut by the Federal Reserve has ignited hopes for relief among homebuyers, but industry experts urge caution against expecting a drastic drop in mortgage rates. Chen Zhao, Redfin’s lead economic analyst, believes that despite the Fed’s actions, mortgage rates are unlikely to dip below 5.7% in the near future. Similarly, Logan Mohtashami, HousingWire’s lead analyst, predicts that 30-year mortgage rates might settle around 5.75% by the year’s end. Currently, the average 30-year conforming loan rate sits at 6.21%, according to Mortgage News Daily.
The relationship between Fed rate cuts and mortgage rates is more intricate than many realize. While the Fed controls the overnight lending rate for banks, mortgage rates are long-term interest rates determined by bond markets. These rates often anticipate Fed actions and can be influenced by various economic factors beyond the Fed’s direct control.
Two key elements determine how Fed actions impact mortgage rates: the yield curve and the mortgage spread. The yield curve illustrates the difference between long-term rates, like 10-year Treasury yields, and short-term rates. The mortgage spread accounts for the added risk associated with mortgages compared to Treasury bonds.
Redfin suggests that as the Fed cuts rates, long-term Treasury yields are likely to fall less than short-term rates, potentially leading to long-term rates exceeding short-term rates. Concurrently, the gap between mortgage rates and long-term Treasury yields is anticipated to shrink. These combined factors indicate that while mortgage rates might decline, the drop will be significantly smaller than the Fed Funds rate reduction.
Another factor influencing how low mortgage rates can go is the strength of the labor market. Kevin Ryan, CFO of Better, emphasized in an interview with HousingWire that Fed policymakers are more concerned with the labor market than inflation. Ryan stated, “The Fed presumably will continue to stay data-dependent within this recalibration thing. I see a slowly thawing housing sector. If you wake up in 18 months, you’re going to have rates materially lower.”
The recent downward trend in rates has positively impacted the housing market, with purchase applications increasing for four consecutive weeks. However, the effect on home sales has been mixed. While new home sales are trending upward, existing home sales continue to struggle, experiencing a 2.5% month-over-month decline in August, according to the National Association of Realtors.
Noah Rosenblatt, co-founder of real estate analytics firm UrbanDigs, cautions that the housing market has yet to fully stabilize. Rosenblatt told HousingWire, “We still have election uncertainty, local policy uncertainty and geopolitical uncertainty that are weighing on investors’ and buyers’ minds and could dampen the depth and duration of this recovery.”
While some relief might be on the horizon for homebuyers, the path to significantly lower mortgage rates appears longer than many had anticipated.
