After leaving the benchmark interest rate untouched for a nine-month stretch, the Federal Reserve in September made the first in what is anticipated to be a series of rate cuts. These cuts will have ripple effects across the broader economy — but will they do anything to reshape the housing market, namely, mortgage rates?
Initially, “amid expectations that the Federal Reserve would cut interest rates, mortgage rates fell to their lowest level in nearly a year, dropping to 6.30%,” said Bankrate, citing its national survey of lenders. But then, “once the rate cut became official, mortgage rates rose.”
How are mortgage rates and the federal funds rate connected?
For starters, it is important to note that the Fed “does not directly set mortgage rates, which instead tend to follow the yields of long-term bonds,” said Realtor.com. When the yields of 10-year government bonds go up, they “tend to push up mortgage rates, and vice-versa,” said The Associated Press.
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However, bond markets are influenced by the Federal Reserve, specifically “investor expectations about future Fed policy and financial conditions, including inflation and government deficits,” said Realtor.com. The direction of that correlation is not always so obvious, however — for instance, “when the Fed cuts rates that can give the job market and overall economy a boost, it can also fuel inflation,” which “in turn, could push up mortgage rates,” said the AP.
Will a Fed rate cut push down mortgage rates?
A rate cut by the Fed alone is not enough to push down mortgage rates, particularly given the complex combination of a weakening job market and stubborn inflation that the central bank is currently contending with. “It’s not just about what the Fed is doing today, it’s about what they’re expected to do in the future, and that’s determined by things like economic growth, what’s going to happen in the labor market and what do we think inflation is going to be like over the next year or so,” said Danielle Hale, a chief economist at Realtor.com, to the AP.
As things stand, experts predict that the “mortgage interest rate forecast for the fall could bring lower rates, but probably not anything major,” said CBS MoneyWatch.
Should you wait for further rate cuts to buy a house?
Given the unpredictability of where everything will head — and how decisions by the Fed could indirectly influence mortgage rates — it is not necessarily worth continuing to wait if you have been standing on the sidelines as a prospective homebuyer.
Plus, if interest rates were to drop, that would “increase the number of people looking to buy and lock in a lower interest rate,” which then “drives up demand for the already limited supply of homes,” said Yahoo Finance. A lower mortgage rate will not do you that much good if you just end up paying more for a house, which goes to show that the cost equation for homebuying is multi-factored.
