As someone who has lots of friends who are Realtors and clients who are looking to buy and sell, I’m very interested in people’s perceptions of what mortgage rates will do in the next 6 months or so.
Lots of people seem to be waiting for direction from the Federal Reserves interest rate actions to decide whether to buy or sell a house. It makes me wonder: If the Fed cuts the overnight borrowing rate between banks, does that immediately translate into lower mortgage rates?
It turns out, all this waiting may be for naught.
When the Federal Reserve (Fed) cuts interest rates, it lowers the federal funds rate, which is the rate banks charge each other for short-term overnight loans. This often makes borrowing cheaper for banks. However, this doesn’t automatically lead to lower mortgage rates.
Mortgage rates, especially for fixed-rate loans, are influenced more by the 10-year Treasury bond yields and the broader bond market rather than just the Fed’s short-term rate.
While the Fed cutting rates can create expectations for lower mortgage rates and can reduce costs for adjustable-rate mortgages that track short-term rates, fixed mortgage rates often do not fall immediately or proportionally after a Fed rate cut.
Factors like inflation, investor demand for mortgage-backed securities, and economic conditions also play a big role.
If you are open to alternative mortgage structures, adjustable-rate mortgages are more likely to reflect Fed rate cuts faster than fixed mortgages.
Also, when a Fed rate cut is widely expected, the anticipation is often already reflected in current mortgage rates. Lenders and investors adjust mortgage rates based on expectations about what the Fed will do, especially if future rate cuts appear likely.
This pricing-in process can cause mortgage rates to fall before the Fed actually announces a cut. Once the cut occurs, there may be little immediate change.
And, in worse news for the waiters, sometimes mortgage rates can even rise if the Fed’s move matches or disappoints prior expectations.
Overall, a Fed rate cut may eventually help lower mortgage rates, but it’s not a direct or immediate effect.
So, what’s a buyer or seller to do? It might be wise to start adjusting to the new reality: You are not going to see rates in the 4% or 5% any time soon, or maybe ever. We may all need to adjust our home prices (if selling) or target purchase range (if buying) to reflect where rates are now.
