Mortgage rates skyrocket despite Fed rate cuts

In the United States, since the Federal Reserve's first interest rate cut in September 2023, the 30-year fixed mortgage rate has unexpectedly increased by almost one full percentage point. This development perplexed many, as borrowers had anticipated lower mortgage rates following Fed rate cuts. Lisa Sturtevant, Chief Economist at Bright MLS, explains that the mortgage market reacts more to expectations rather than the actions of the Fed. Prior to the rate cut, market participants had already priced in the anticipated rate reduce, which may have accounted for part of the pre-existing market movement. Sturtevant highlights a crucial moment in September when mortgage rates hovered around 6%, which represented a brief opportunity for buyers. However, many potential homebuyers have been hesitant to make decisions, waiting for further market corrections. Sturtevant predicts that rates could hit the mid-sixes, which differs significantly from the pandemic lows of approximately 3%. Over the past fifty years, the average 30-year mortgage rate has been around 7.5%, indicating that current rates, while seemingly high, are not unprecedented. The housing market’s response remains uncertain, especially with persistent high mortgage rates discouraging potential buyers. Sturtevant believes that if a downward trend in mortgage rates emerges, it could capture the attention of buyers who have been waiting. Despite high rates, there is substantial unmet demand in the market, suggesting that some buyers may eventually decide to enter now, rather than risk missing an opportunity, like the one in September. Moreover, as the Fed forecasts only two more rate cuts in 2025, analysts are debating whether to continue focusing on the Fed's actions or start paying more attention to other financial indicators, such as the 10-year treasury yield. Sturtevant points out that the Fed’s decisions are often responses to existing economic data, indicating that key indicators like inflation and consumer confidence will be vital in predicting future mortgage rates. Although inflation seemed to decrease, recent reversals have added complexity, making the housing market particularly challenging to navigate in the coming months.