The Federal Reserve has reduced its key interest rate by 50 basis points, leaving many wondering what this means for the housing market. While immediate drops in mortgage rates are unlikely, lower rates are expected in the near future.
To understand the context, inflation hit a four-decade high two summers ago, prompting the Fed to hike interest rates aggressively. This led to a sharp increase in mortgage rates, which had been at historic lows, effectively freezing the housing market as buying and selling activity diminished. Although a rate cut might suggest lower mortgage rates, the connection isn’t direct; mortgage rates are more closely linked to the 10-year treasury yields, and currently, the spread between them is higher than normal.
After several months of positive economic indicators, speculation grew that the Fed would implement a rate cut this month, which resulted in mortgage rates falling to their lowest levels in 19 months. “Mortgage rates are far more related to the expectation of what the Fed will do rather than what the Fed actually does,” said Thomas Ryan, an economist at Capital Economics. This suggests that current mortgage rates already account for the anticipated cut.
As of last Thursday, the average 30-year fixed mortgage rate was 6.2%, down from 7.22% in early May and 7.79% last October. Despite these declines, activity in the housing market remains sluggish, although refinancing has seen a slight uptick. Many potential buyers are waiting for even lower rates, but experts caution that this may not be the most strategic approach. “The benefit is already out there and available in the form of lower mortgage rates than just a few months ago,” remarked Mark Fleming, chief economist at First American.
The relationship between Fed actions and market expectations plays a significant role in the movement of the 10-year treasury yields. Economic uncertainty has led to increased spreads in recent years, but with the Fed initiating rate cuts, this uncertainty is expected to decrease, potentially bringing spreads down and applying downward pressure on mortgage rates. However, the timing and extent of these reductions remain unclear as much of the decline has already been realized.
Fleming suggests that the current focus should be less on the immediate effects of this week’s decisions and more on the broader trend of monetary easing that the Fed is entering. “They will continue to cut rates through next year…it’s a clear signal that lower rates are coming in the months to come,” he noted.
Despite the potential for lower rates, high home prices continue to pose challenges, as highlighted by Fed Chair Jerome Powell. Moody’s economist Nick Villa emphasized that while reduced mortgage rates might help stimulate supply, the country faces a structural housing deficit and must prioritize the construction of more homes.