So the Federal Reserve just cut its benchmark interest rate by 50 basis points. But what does that mean for us poor souls stuck in a real estate world that feels like purgatory? It’s pretty complicated, but what you need to know in 10 seconds or less is that while mortgage rates probably won’t drop immediately, lower rates are coming.
Let’s step back for a moment to fully understand the current situation. Inflation hit a 40-year high two summers ago; the Fed had already raised rates and was only getting more aggressive. Mortgage rates, which had been near all-time lows, rose sharply and the housing market froze: people stopped buying and selling homes. After hearing that, you might think a rate cut would cause mortgage rates to drop, but the federal funds rate is not directly tied to mortgage rates. It is tied to the 10-year Treasury mortgage rate, and the spread between the two is higher than usual.
But after months of positive economic data, expectations grew that the Fed would finally cut rates this month. That announcement sent mortgage rates to their lowest in 19 months as the bond market was already pricing in a cut. “Mortgage rates depend much more on expectations of what the Fed will do than on what the Fed actually does,” said Thomas Ryan, an economist at Capital Economics. Assets“Mortgage rates are already reflecting this rate cut.”
The average weekly rate on 30-year mortgages was 6.2% last Thursday. It was 7.22% in early May and 7.79% in October of last year. So we’ve come a long way. But buying and selling haven’t picked up (although there has been some recovery in refinancing). Either way, it doesn’t look like that’s going to change much. People are waiting for lower mortgage rates, even if they won’t get them right away. But letting the fear of missing out on lower rates hold them back may not be the best attitude. “The upside is already there and available in the form of lower mortgage rates than a few months ago,” Mark Fleming, chief economist at First American, told Assets.
Still, what the Fed does relative to expectations actually matters when it comes to the 10-year Treasury. When there’s uncertainty, that drives the spread higher, Ryan explained. And spreads have widened significantly over the past few years. But now that we know the Fed has entered its rate-cutting era, there’s less uncertainty and we’ll likely see the spread narrow. That will, of course, put “downward pressure on mortgage rates,” Ryan said. It’s unclear when that will happen or by how much they’ll fall, since much of the existing decline has already happened, so maybe we should take a longer-term look.
“I think it’s actually less about this Wednesday and more about us entering a cycle of monetary easing than it is about monetary tightening,” Fleming said. “In other words, it’s about the Fed finally starting to cut rates… whatever they do on Wednesday, they’re not going to be done with it. They’re going to continue cutting rates into next year… it’s less about whether or not rates fall immediately on Wednesday. It’s a clear signal that lower rates are to be expected in the coming months.”
However, we should not forget that despite lower interest rates, housing prices are still high and this will continue to be a problem – as Fed Chairman Jerome Powell himself pointed out. Moody’s economist Nick Villa also recently put it well: “While lower mortgage rates are one way to increase supply, the country ultimately has a structural housing deficit and needs to continue to build more homes.”
