Here’s a riddle for market watchers: Hours after the Federal Reserve cut interest rates for the first time since 2020 on Wednesday, mortgage rates rose 4 basis points.
Why? And are mortgage rates going up from now on?
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MarketWatch spoke to economists who said the hike is temporary, likely reflecting how markets are pricing the central bank’s next move.
“This is a temporary blip. There’s no reason why they shouldn’t continue to decline for a while,” Robert Frick, chief corporate economist at Navy Federal Credit Union, told MarketWatch.
“I fully expect that [the 30-year mortgage rate] will settle below 6% in the next month or two,” he said. “So my advice would be [for people to] Try not to read too much into it, because the market is fickle.”
On Wednesday afternoon, after the Fed announced it would cut its key interest rate by 50 basis points, Mortgage News Daily, a website that publishes daily updates on interest rates, crashed. This was perhaps a sign of the intense interest in the direction of interest rates.
Mortgage News Daily did not immediately respond to a request for comment.
The site later reported that the 30-year yield rose 4 basis points, or 0.04%, to 6.15% on Sept. 18, the day the Fed announced its rate cut. The next day, it reported that the 30-year yield rose another 2 basis points to 6.17%.
That contrasted with a report from Freddie Mac that measured weekly averages for the 30-year fixed-rate mortgage, which showed mortgage rates fell to a two-year low on Sept. 19. That weekly report does not poll lenders, but is based on actual mortgage applications submitted to Freddie Mac by lenders nationwide.
So why did rates rise hours after the Fed eased monetary policy? “It’s because of what the Fed indicated it would do at future meetings,” Daryl Fairweather, chief economist at Redfin RDFN, told MarketWatch.
“The market was hoping for more than 50 basis points [in] cuts this year, but they indicated they would do it at a pace of 25 basis points per meeting,” she continued. “Mortgages are over [multiple] decades…so what the Fed says about future cuts may be more important than what they say now.”
Mortgage rates aren’t tied to the Fed’s interest rate moves. Instead, mortgage rates typically fall ahead of a Fed rate cut as investors try to anticipate where the central bank will go. And based on that, the 10-year Treasury yield BX:TMUBMUSD10Y is a good indicator of where mortgage rates will move.
Bond yields were higher Thursday for a number of reasons, according to Melissa Cohn, regional vice president of William Raveis Mortgage in Connecticut.
With multiple reports suggesting the economy is doing better than expected — from jobless claims to the Philadelphia Fed’s factory gauge to the stock market rally — “people are jumping out of bonds and into stocks,” Cohn said. “Whether bond yields continue to rise in the near term depends entirely on the data.”
But mortgage rates “will stabilize and even fall further this year if inflation continues to fall toward the Fed’s 2% target,” Cohn said. The “jobs data will also play a big role in rates for the rest of the year,” she added.
Most economists expect the average 30-year mortgage rate to fall below 6% in the coming year. That could be a disappointment for potential homebuyers who were hoping rates would fall to the lows seen at the start of the pandemic. “We’re never going to see a 3% mortgage rate [again] “Probably in our lifetime,” Frick said, “but we’ll definitely get to the fives at some point.”
Housing finance giant Fannie Mae (FNMA) expects the 30-year yield to fall to 6% in the first quarter of next year and to 5.7% by the end of 2025, according to its September housing forecast.
Should potential buyers step in now or wait? For a buyer, small changes in rates shouldn’t be the biggest factor in their decision, Frick advised.
“The critical factor is, can you find a house that you want to buy, and can you afford that price? Because the difference between waiting for a quarter or even a half point drop in a mortgage rate is relatively insignificant compared to finding a house that you can afford,” he said.
And for homeowners hoping to lower their monthly payments by refinancing, should they act now? That’s a more complex question, Frick said.
“It depends on what rate they were paying. … My rule of thumb, which is different from a lot of people’s rule of thumb, is you have to have a 2 percentage point difference to be absolutely clear that you need to refinance,” Frick said.
In other words, if the 30-year rate is 6.09% on September 19, refinancing would make sense for someone with an 8.09% rate.
He added: “If you’re going to be in the house for a really long time and you can get a 1 percentage point difference, then yes, it’s probably worth it” after factoring in closing costs, which typically range from 2% to 6% of the loan amount. “But if you committed at 7.7% and you can now refinance at 5.7%, then that’s a no-brainer.”
