Introduction to Mortgage Rates and the Federal Reserve
The Federal Reserve, also known as the "Fed," recently cut interest rates, and this move has sparked discussion about its impact on mortgage rates. Many people are wondering if this means that mortgage rates will continue to drop. However, the relationship between the Fed’s rate cuts and mortgage rates is not straightforward.
How Rate Cuts Affect Mortgage Rates
Mortgage rates have been falling since late July due to expectations of a Fed rate cut. The average rate on a 30-year mortgage was at 6.35% last week, which is the lowest level in nearly a year, according to mortgage buyer Freddie Mac. However, last year’s experience shows that a Fed rate cut does not necessarily mean mortgage rates will keep falling. In fact, after the Fed cut its main rate two more times, mortgage rates rose and kept climbing until the average rate on a 30-year home loan reached just over 7% by mid-January.
How Mortgage Rates Are Set
The Fed does not directly set mortgage rates. Instead, mortgage rates are influenced by several factors, including the Fed’s interest rate policy decisions and bond market investors’ expectations for the economy and inflation. Mortgage rates generally follow the trajectory of the 10-year Treasury yield, which lenders use as a guide to pricing home loans. The 10-year Treasury yield has been easing since mid-July due to growing signs of a weakening job market, which fueled expectations of a Fed rate cut.
Factors Influencing Mortgage Rates
The Fed’s rate cut can give the job market and overall economy a boost, but it can also fuel inflation. If inflation rises, mortgage rates could increase as well. Other factors, such as economic growth and labor market trends, can also impact mortgage rates. According to Danielle Hale, chief economist at Realtor.com, "It’s not just about what the Fed is doing today, it’s about what they’re expected to do in the future, and that’s determined by things like economic growth, what’s going to happen in the labor market, and what do we think inflation is going to be like over the next year or so."
What to Expect for Mortgage Rates
Ahead of the Fed’s rate cut, the futures market had priced in expectations that the central bank would cut its key interest rate at upcoming policy meetings this year and into 2026. However, the Fed’s latest projections show a less aggressive path of rate cuts than the market has been expecting. This means that some risk of upward pressure on mortgage rates remains. According to Hale, "The decline in mortgage rates is likely to continue at least through this week." Hale forecasts that the average rate on a 30-year mortgage will be between 6.3% and 6.4% by the end of this year.
Overall Impact on the Housing Market
The late-summer pullback in mortgage rates has been a welcome trend for the housing market, which has been in a slump since 2022. Sales of previously occupied U.S. homes sank last year to their lowest level in nearly 30 years and have remained sluggish so far this year. While lower rates give home shoppers more purchasing power, mortgage rates remain too high for many Americans to afford to buy a home. Home prices, although rising more slowly than in years past, are still up by roughly 50% nationally since the start of this decade.
The Options for Home Shoppers and Buyers
Predicting when mortgage rates will decline and by how much is daunting due to the many variables that can influence their trajectory. Home shoppers who can afford to buy at current rates may be better off buying now rather than attempting to time the market. Many homeowners looking to refinance have already taken advantage of the decline in rates, sending applications for refinance loans sharply higher in recent weeks. When refinancing, consider whether you can reduce your current rate by at least one percentage point to help offset refinancing fees.
Conclusion
In conclusion, while the Fed’s rate cut may lead to a decrease in mortgage rates, it is not a guarantee. Many factors influence mortgage rates, and the relationship between the Fed’s rate cuts and mortgage rates is complex. Home shoppers and buyers should be aware of these factors and consider their options carefully. As the housing market continues to evolve, it is essential to stay informed about the latest developments and trends in mortgage rates and the economy. By understanding the factors that influence mortgage rates, individuals can make more informed decisions about their home buying and refinancing options.
