The Fed Cut Rates, So Why Do Mortgage Rates Keep Rising?

The Federal Reserve has now cut interest rates twice this year, lowering the Fed Funds rate another quarter point this week. But if you’ve been looking to buy a home, you’ve probably noticed that mortgage rates haven’t dropped. Rather, they have done the opposite.

Increases in the federal funds rate through 2022 and 2023 were part of the reason mortgage rates rose from about 3.00% for a 30-year fixed-rate mortgage at the end of 2021 to 7.79% for the same loan type this week, that ended on October 26, 2023. Fed interest rate hikes were also the reason credit card interest rates rose, as well as the interest rates attached to auto loans, student loans and other types of loans.

So why haven’t all interest rates fallen since the Fed cut rates? Consumers have wondered about this, especially when it comes to mortgage interest rates, which are not falling as many consumers thought they would.

For example, mortgage data from Freddie Mac shows the average rate for a 30-year fixed-rate mortgage came in at 7.22% in the week ending May 2, 2023, and then fell to 6.08% in the week ending the 26th. September 2024 (just after the Fed cut interest rates). From there, the average interest rate for a 30-year mortgage loan increased to 6.79% for the week ending November 7, 2024.

Why mortgage interest rates have not fallen

According to Shawn DuBravac of the Avrio Institute, mortgage rates are affected by a wide range of factors in addition to movements in the federal funds rate. Mortgage rates are particularly sensitive to interest rates on longer bonds, especially the 10-year government bond. At the same time, 10-year Treasury yields are affected by Federal Reserve policy and various other factors such as inflation expectations, global interest rate differentials, investor sentiment and overall supply and demand dynamics.

DuBravac adds that the 10-year Treasury yield has been rising recently, helping to build upward pressure on mortgage rates. Reasons for this may be increased investor concerns about the introduction of additional monetary stimulus into the economy plus potential fiscal overreach by the incoming administration.

Another key element that affects mortgage rates is the risk premium, or the extra return that investors demand to hold mortgage-backed securities (MBS) compared to US Treasuries. DuBravac says this prize has recently been expanded.

“This is perhaps the most overlooked factor in explaining why mortgage rates are currently high,” he says.

Darren Tooley, who serves as a senior loan officer at Cornerstone Financial Services in Southfield, Michigan, says that October Bureau of Labor Statistics (BLS) jobs report also played a role in today’s average mortgage rates. This report showed that 254,000 jobs were created in September, which is almost double the expected number. These strong employment numbers may have changed market expectations and thus affected mortgage rates in their own way.

What does it take for mortgage interest rates to fall?

If you’re waiting for mortgage rates to drop so you can buy a home or refinance the loan on a property you already own, you could be in limbo for a long time. After all, it took 11 Fed rate cuts over a two-year period to get mortgage rates from record lows to where they are today, so it would take a lot to have a significant effect.

Jaye Hohman from Hohman Finance says several factors could still help push mortgage rates down from where they are right now, including bad data about the economy like poor employment numbers or a slowdown in GDP growth. Other economic factors such as an increase in credit card defaults or auto loan defaults can also lower rates.

Chris Heller of Movoto Real Estate adds that lower inflation numbers could lead to lower mortgage rates, mostly because investors are more willing to accept lower returns. Economic stabilization is another key factor. If the economy moves towards sustainable growth without inflationary pressures, we will see interest rates ease, he said.

Heller also points out that actions by the Federal Reserve aimed at improving long-term economic health could contribute to a downward trend in interest rates, especially if those efforts lead to lower inflation.

“Mortgage rates are likely to fall as confidence in the economy increases and inflation concerns subside,” he says.

Should you wait to buy a home or refinance?

These explanations can help you understand more about what’s happening with today’s mortgage rates, but they won’t make your decision any easier if you’ve been waiting to buy or refinance. We all know that even a small drop in interest rates can make monthly mortgage payments significantly more affordable, and that the savings can be even greater for larger loan amounts. The opposite is of course also the case.

Heller also says it’s important to take the long view when it comes to mortgage rates, even though today’s rates are higher than we saw in 2020 and 2021. Looking back at historical mortgage rates from the past few decades, you e.g. I will find that average interest rates for a 30-year home loan rose as high as 18% in the early 1980s before falling closer to the 7% to 10% range throughout the rest of the 80s, 90s ‘s and early 2000s.

You should also remember that the mortgage you have now does not have to be forever. Tooley says it’s always a good time to get a mortgage because you can always refinance over time (and even multiple times) as market conditions change.

He adds that waiting for mortgage rates to drop before buying a home can also cost you on the buying end of the equation, mostly due to increased competition for homes when rates finally do come down. So even if you lock in a lower mortgage rate, you may end up paying a higher selling price for the home you want.

You can also wait for mortgage rates to fall and watch house prices rise even more. So what would you do? Ultimately, most experts agree, buy a home when you’re ready and can afford the necessary down payment — not when mortgage rates hit an arbitrary number.