Mortgage Rates: Why Are they Rising Despite Fed Rate Cuts?
Mortgage Rates: Why Are they Rising Despite Fed Rate Cuts?
In 2024 mortgage rates decreased one percentage point following three consecutive rate reductions by the Federal Reserve. These actions resulted in a decline in the federal funds rate, the rate at which banks lend money to each other, from a range of 5.25% to 5.50% in September to 4.25% to 4.50% in December.
Lowering rates typically lead to reduced mortgage rates because overall borrowing cost decreases. In spite of the Fed’s rate cuts, mortgage rates have actually increased; why is this happening?
The Relationship Between Mortgage Rates and Fed Rate Cuts
The average 30-year fixed mortgage rate stands at 7% as of January 15, 2025.
The connection between the Fed's actions and mortgage rates is not always straightforward. The Federal Reserve primarily influences short-term interest rates, while mortgage rates are more closely tied to long-term rates, specifically the 10-year Treasury yield. When the Fed lowers short-term rates, it does not necessarily mean that long-term rates, including mortgage rates, will decrease as well.
Market Expectations and Economic Outlook
One key factor driving the increase in mortgage rates post-Fed rate cuts is market expectations. If investors anticipate higher inflation or economic growth in the future, they may demand higher yields on long-term investments like Treasury bonds. This increased demand for higher yields pushes up long-term interest rates, including mortgage rates. Additionally, a more positive economic outlook can lead to higher mortgage rates. When the economy is thriving, demand for loans increases, putting upward pressure on interest rates. Lenders raise rates in response to this heightened demand, further contributing to the rise in mortgage rates.
Inflation Concerns and Mortgage Rates
Inflation rose 2.9% on an annual basis in December 2024, underlying the Federal Reserve's continuous challenge to bring inflation to its target of 2%.
Inflation plays a significant role in shaping mortgage rates. When inflation expectations rise, lenders may increase mortgage rates to protect against the eroding purchasing power of future loan repayments. The recent uptick in inflation, albeit minor, may have contributed to the increase in mortgage rates. Lenders may be factoring in higher inflation expectations when setting mortgage rates, especially in a rising rate environment.
It could be a while before mortgage rates decline significantly, at least until the Fed signals they believe inflation is well under control. Mortgage rates in the 6% - 7% range could persist for some time, making it unlikely that waiting will result in significant rate decline in the near future.
The incoming administration has proposed vigorously future Inflationary policies such as tariffs increasing the cost of goods, deportations decreasing available labor and increasing labor cost, Tax cuts increasing the deficit. These policies, if implemented, are likely to impede future rate cuts, and a possibility of rate increases to combat inflation.
Conclusion: Navigating the Mortgage Rate Landscape
The combination of persistent inflation, the Federal Reserve signaling a rate cut pause, a healthy labor market, and the implementation of promised inflationary policies, signal the era of extremely-low mortgage rates will remain far from returning in the foreseeable future.
The good news is that mortgage rates are not the only factor impacting your monthly payment. Other negotiable factors include Price, closing costs, down payment, and HOA assessments’ ownership (who pays?).
In a high-inventory residential housing environment, buyers have the leverage to negotiate Price discounts that would reduce their monthly payments significantly should they enter the market now, while preserving their ability to refinance when mortgage rates decline.
What’s your Mortgage Monthly Payment Budget? Generate Pricing scenarios fitting your monthly payment budget range by using OsvAna Realty mortgage calculator.
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