Here’s a puzzle for market watchers: Hours after the Federal Reserve cut interest rates Wednesday for the first time since 2020, mortgage rates ticked up by 4 basis points.
Why? And are mortgage rates on an upward trend from here on out?
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MarketWatch spoke to economists who said that the increase is a temporary one, likely due to how markets are assessing the central bank’s next move.
“This is a temporary blip. There’s no reason why they shouldn’t continue their decline for a while,” Robert Frick, a corporate economist at Navy Federal Credit Union, told MarketWatch.
“I fully expect that [the 30-year mortgage rate] will settle below 6% in the next month or two,” he said. “So my advice would be [for people to] try to not read too much into it, because the market is fickle.”
On Wednesday afternoon, after the Fed announced that it was reducing its benchmark interest rate by 50 basis points, Mortgage News Daily, a website that posts daily updates on rates, crashed — perhaps a sign of the intense interest in where rates were headed.
Mortgage News Daily did not respond immediately to a request for comment.
The site later reported that the 30-year rate inched up by 4 basis points, or 0.04%, to 6.15% on Sept. 18, the day the Fed announced its rate cut. The following day, it reported that the 30-year rate had risen 2 more basis points to 6.17%.
That was in contrast to a report from Freddie Mac measuring weekly averages for the 30-year fixed-rate mortgage. It showed that mortgage rates fell to the lowest level in two years on Sept. 19. That weekly report doesn’t survey lenders but is based on actual mortgage applications to lenders across the country that are submitted to Freddie Mac.
So why did rates go up hours after the Fed eased monetary policy? “It’s because of what the Fed indicated they would do at future meetings,” Daryl Fairweather, chief economist at Redfin RDFN, told MarketWatch.
“The market was hoping for more 50 basis points [in] cuts this year, but they indicated they would go at a pace of 25 basis points per meeting,” she continued. “Mortgages are over [multiple] decades … so what the Fed says about future cuts can matter more than what they do today.”
Mortgage rates aren’t tied to the Fed’s moves on interest rates. Rather, mortgage rates typically fall in advance of a Fed rate cut, because investors are trying to anticipate where the central bank will go. And by that measure, the 10-year Treasury yield BX:TMUBMUSD10Y is a good gauge of how mortgage rates will move.
Bond yields were higher Thursday for a couple of reasons, Melissa Cohn, a regional vice president of William Raveis Mortgage in Connecticut, told MarketWatch.
Due to multiple reports indicating that the economy was doing better than expected — from jobless claims to the Philadelphia Fed’s factory gauge, as well as the surge in the stock market — “people bail out of bonds and go to stocks,” Cohn said. “Whether bond yields will continue to go up in the near term is all data-dependent.”
But mortgage rates “will stabilize and even come down more this year if inflation continues to decline to the Fed’s 2% target,” Cohn said. The data on “jobs will also play a big part in rates for the rest of the year,” she added.
Most economists expect the average 30-year mortgage rate to fall below 6% in the coming year. That may be a disappointment for would-be home buyers who’ve been hoping that rates will dip to the lows seen at the start of the pandemic. “We’re never going to see 3% mortgage rates [again] probably in our lifetime,” Frick said, but “we’ll get into the fives, I’m sure, at some point.”
Housing-finance giant Fannie Mae FNMA expects the 30-year rate to fall to 6% by the first quarter of next year and to 5.7% by the end of 2025, according to its September housing forecast.
So should prospective buyers jump in now or wait? For a buyer, small changes in rates should not be the biggest factor in their decision, Frick advised.
“The overriding factor is, can you find a home that you want to buy, and can you afford that price? Because the difference in waiting for a quarter- or even a half-point drop in a mortgage rate is relatively inconsequential to just finding a house that you can afford,” he said.
And for homeowners hoping to reduce their monthly payment by refinancing, should they act now? That’s a more complex question, Frick said.
“It depends on what rate they paid. … My rule of thumb, which is different from a lot of people’s rule of thumb, is you’ve got to have a 2-percentage-point differential for it to be absolutely clear that you should refi,” Frick said.
In other words, if the 30-year rate is at 6.09% as of Sept. 19, refinancing would make sense for someone with a rate of 8.09%.
He added: “If you’re going to be in the house for a really long time and you can get a 1-percentage-point differential, yeah, it’s probably worth it” after factoring in closing costs, which usually range from 2% to 6% of the loan amount. “But if you’ve locked in at 7.7% and now you can refi at 5.7%, that’s a no-brainer.”
