As the Federal Reserve recently announced its first rate cut since last year, many homebuyers are left wondering if mortgage rates will continue to fall. The Fed cut its benchmark rate by a quarter-point and signaled the possibility of two more cuts later this year. This decision reflects increasing concerns regarding the U.S. job market and its implications for the housing market.
Since late July, mortgage rates have been on a downward trend, influenced by the anticipation of the Fed's rate cut. According to Freddie Mac, the average rate for a 30-year mortgage stood at 6.35% last week, marking its lowest level in nearly a year. A similar trend was observed around this time last year, preceding the Fed's first rate cut in over four years, when mortgage rates dipped to a two-year low of 6.08% shortly after the announcement.
However, history suggests that a Fed rate cut does not guarantee a sustained decline in mortgage rates. Following last year's cuts, mortgage rates began to rise, peaking at over 7% by mid-January. Experts caution that even though the Fed has indicated more cuts could be on the horizon, the trajectory of mortgage rates remains uncertain. Lisa Sturtevant, chief economist at Bright MLS, noted, "Rates could come down further, but there are still risks of a reversal in mortgage rates."
It's important to clarify that the Federal Reserve does not directly set mortgage rates. Instead, these rates are influenced by a multitude of factors, including the Fed's monetary policy, investor expectations in the bond market, and overall economic conditions. Mortgage rates typically align with the movements of the 10-year Treasury yield, which serves as a benchmark for pricing home loans. When the yield on these government bonds rises, mortgage rates tend to follow suit, and vice versa.
Recent trends show that the 10-year Treasury yield has been easing since mid-July, primarily due to signs of weakness in the job market, which bolstered expectations for a Fed rate cut. Despite the Fed's previous focus on inflation, the ongoing struggle to keep inflation below its 2% target complicates the outlook for mortgage rates. Danielle Hale, chief economist at Realtor.com, highlighted that future expectations regarding economic growth and labor market conditions will significantly impact mortgage rates.
Looking ahead, experts caution that even with potential rate cuts from the Fed, mortgage rates may not necessarily decline in tandem. Stephen Kates, a financial analyst at Bankrate, emphasized, "If the Fed keeps lowering rates, it doesn’t necessarily mean mortgages will go down." The futures market had initially anticipated a more aggressive approach to rate cuts, but the Fed’s recent forecasts suggest a more measured path, maintaining a risk of upward pressure on mortgage rates.
According to Hale, the average rate on a 30-year mortgage is expected to hover between 6.3% and 6.4% by year’s end, with other economists echoing similar predictions that rates will likely remain above 6% this year.
The recent decline in mortgage rates has been a positive development for the housing market, which has struggled since 2022 due to rising rates. Sales of previously occupied homes have plummeted to their lowest levels in nearly three decades. While lower rates can enhance purchasing power for homebuyers, they still remain high relative to historical norms, particularly given the approximately 50% rise in home prices since the beginning of the decade.
Sturtevant noted, "While lower rates will bring some buyers and sellers into the market, today’s cut will not be enough to break up the housing market logjam." To significantly improve affordability, we would need to witness a more substantial decline in mortgage rates and a slowdown or reversal in home price growth.
For prospective homebuyers, timing the market can be challenging due to the unpredictable nature of mortgage rates. Kates suggests that those who can afford to buy now should consider doing so rather than waiting for potentially lower rates. This is especially true if they find a property that meets their needs.
Homeowners looking to refinance have already begun to respond to the decrease in rates, leading to a surge in refinance applications. A general guideline when considering refinancing is to ensure that you can lower your current rate by at least one percentage point, which can help mitigate the impact of refinancing fees.
In conclusion, while recent mortgage rate cuts may provide some relief for homebuyers, the complexities of the housing market and economic indicators suggest that vigilance and flexibility will be key for anyone navigating these waters.
