Why Didn’t Mortgage Rates Fall More After the Fed's Rate Cut?

Why Didn’t Mortgage Rates Fall More After the Fed's Rate Cut?

Understanding the Impact of Federal Reserve Decisions on Mortgage Rates

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For the first time this year, the Federal Reserve cut its short-term interest rate by a quarter point. While mortgage rates did drop this week, continuing a recent trend, some hopeful home buyers may have expected deeper cuts in response to the Fed’s long-anticipated move.

The 30-year fixed-rate mortgage averaged 6.26% this week, the lowest of the year, according to Freddie Mac's weekly mortgage market survey. However, mortgage rates still remain higher than a year ago, when they averaged 6.09%.

Despite the Fed’s latest rate cut, “mortgage rates may stay relatively flat in the short term since markets had already priced in this cut,” says Bill Banfield, chief business officer at Rocket Mortgage.

Understanding Mortgage Rates

The federal funds rate reflects the interest rate that banks borrow and lend to one another; it’s not the rate that consumers pay. Mortgage rates are more closely tied to Treasury yields, which have been lowering over recent weeks compared to earlier in the year, and the general economy.

This distinction is crucial for home buyers. While the Fed's actions influence the broader financial landscape, they do not directly dictate mortgage rates. As a result, buyers may find themselves navigating a complex environment where expectations do not always align with reality.

Adjustable-Rate Mortgages Gain Popularity

Borrowers may see immediate impacts from the Fed’s action on certain loan products. For example, “consumers could benefit from lower short-term rates, making adjustable-rate mortgages—which closely follow the Fed’s moves—more attractive,” Banfield explains.

The share of ARM mortgage applications is surging, comprising about 13% of all mortgage applications in the latest week—the highest level since 2008, according to the Mortgage Bankers Association.

“ARMs typically have initial fixed terms of five, seven, or ten years, so those loans do not pose the risk of early payment shock that pre-2008 ARMs did,” says Michael Fratantoni, MBA’s chief economist. “Borrowers who opt for an ARM are seeing rates about 75 basis points lower than for 30-year fixed-rate loans.”

Mortgage Rate Averages This Week

Overall, mortgage applications for home purchases have been responding to lower rates over recent weeks. Applications are up 3% in the latest week and have continued to climb by double-digit margins compared to a year ago, moving 20% higher in the latest report, according to the MBA.

The uptick in mortgage applications can be a gauge of future home buying activity. However, so far, that rise has not translated into a meaningful increase in closed home sales. Existing-home sales were up 2% in July month-over-month, with only a 0.8% increase in sales year-over-year, according to National Association of REALTORS® data. NAR will release its latest report on existing-home sales for August on Sept. 25.

Freddie Mac reports the following average mortgage rates for the week ending Sept. 18:

• 30-year fixed-rate mortgages: averaged 6.26%, dropping from last week’s 6.35% average. A year ago, 30-year rates averaged 6.09%.

• 15-year fixed-rate mortgages: averaged 5.41%, falling from last week’s 5.50% average. Last year at this time, 15-year rates averaged 5.15%.

  
  

The Future of Mortgage Rates

Looking ahead, it’s essential to consider how economic indicators and the Fed's policies will shape the mortgage landscape. As we navigate these changes, staying informed will be key for potential home buyers.

The current environment may seem daunting, but understanding the factors at play can help you make informed decisions. Whether you’re considering buying, selling, or investing, I’m here to help you through the process.

As always, I am just a phone call, email, or text away and happy to answer any of your real estate or relocation questions.

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