For the third consecutive gathering, the Federal Reserve cut interest rates—a “hawkish” move with the aim of supporting a weakening employment sector. This 0.25% reduction lowered the benchmark interest rate to a span of 3.5% to 3.75%—however, analysts and real estate specialists caution that this action won't influence borrowing costs for mortgages as prospective homeowners had anticipated.
TL;DR
- Federal Reserve cut interest rates 0.25% to support employment, but mortgage rates unaffected.
- Mortgage rates are linked to long-term debt, not the Federal funds rate, and are already priced in.
- Future mortgage rates depend on job and inflation data; rates unlikely to fall significantly.
- High home prices remain a major barrier to affordability, even with lower mortgage rates.
Chen Zhao, who leads economics research at Redfin, stated in a Wednesday post that the Federal Reserve's interest rate reduction in December will not impact mortgage rates “because markets have already priced it in.”
The Federal Reserve manages the Federal funds rate, a benchmark banks use when lending to one another, which significantly influences the cost of credit cards, personal loans, and home-equity lines. In contrast, a typical 30-year mortgage represents a long-term borrowing arrangement, and its interest rates are more closely linked to the returns on extended-term debt instruments such as the 10-year Treasury note and mortgage-backed securities.
“Since this rate cut was no surprise, the markets have taken it in stride,” 43-year mortgage industry veteran Melissa Cohn, regional vice president of William Raveis Mortgage, told Coins2Day. She said more dropping shoes in terms of economic data will be the real turning point: “The future of bond yields and mortgage rates will be determined as new data on jobs and inflation get released.”
Mortgage News Daily reports that the present mortgage interest rate stands at 6.3%, a figure considerably exceeding the sub-3% rates that individuals purchasing homes during the pandemic recall, though it remains distant from the 8% peak in October 2023.
“The committee’s projections and Chair Jerome Powell’s remarks indicate that this will be the last interest cut for a while,” Zhao wrote. “Given the underlying economic fundamentals of 3% inflation coupled with a weakening—but not recessionary—labor market, the Fed is likely to hold steady in the near future.
“Mortgage rates are unlikely to fall or rise by much,” she continued.
The impact of mortgage interest rates on the cost of buying a home
Interest rates on home loans represent a single component of the broader challenge of housing affordability. Although it might seem like the primary obstacle to homeownership, particularly recalling the surge in the housing market during the pandemic, these borrowing costs are merely one element among others.
To provide context, Zillow previously announced this year that not even a 0% mortgage rate would enable home purchases to be within reach in numerous large American metropolitan areas.
Let that sink in.
Even without any interest accruing on borrowed funds, purchasing a residence remains unattainable for the average American. A significant factor in the affordability challenge is the cost of homes, which are more than 50% higher than in 2020. This situation has prevented prospective buyers from entering the marketplace and existing owners from listing their properties.
According to Zillow economic analyst Anushna Prakash, the decrease in mortgage rates needed to render an average residence attainable (at approximately 4.43%) for the standard purchaser amounts to “unrealistic,”.
“It’s unlikely rates will drop to the mid-[4% range] anytime soon,” Arlington, Va.–based real estate agent Philippa Main told Coins2Day. “And even if they did, housing prices are still at historic highs.” With 11 years of experience, Main is also a licensed mortgage loan officer.
Certainly, a number of financial experts perceive a potential improvement for individuals seeking to purchase homes who are currently struggling with elevated borrowing costs and property values.
“For prospective buyers who have been waiting on the sidelines, the housing market is finally starting to listen,” wrote First American chief economist Mark Fleming in an Aug. 29 blog post. First American’s analysis takes into account inflation, and Fleming said: “The price of a house today is not directly comparable to the price of that same house 30 years ago.”
