I’m stepping out of my usual lane as a real estate broker and putting my finance cap on for this one. I was a finance major in college, so while I don’t pretend to be an economist, I understand the numbers well enough to cut through the noise better than most.
Once again, following the Fed’s rate cut, mortgage rates abruptly reversed course, wiping out the steady declines we’d seen over the past several weeks. For the first time in three years, 30-year fixed FHA and VA loans had dipped below 6%, averaging around 5.89% and 5.9%, with conventional 30-year fixed rates not far behind. Just a year ago, those same loans were hovering near 7%, underscoring how volatile this market has become.
Too many people still repeat the myth that mortgage rates will benefit or go down in tandem from a Fed cut. While there is a correlation between the two, mortgage rates reflect an expectation of cuts, or in other words, the rates today reflect where investors believe the Federal Reserve’s policy will be six to twelve months from now, not where it stands today. Markets move ahead of the Fed, and traders price in anticipated easing or tightening before it happens, so current mortgage rates already incorporate expectations about future inflation, economic growth, and monetary policy rather than current conditions.
Today, Powell pushed back against the idea that another rate cut in December is a sure thing, saying that the Fed still needs more evidence of cooling inflation before committing to further rate cuts. That cautious tone is not what the markets had been pricing in, nor what was almost a foregone conclusion, leading lenders to quickly reprice rates in the event there are no more future cuts.
Mortgage rates react right away to what investors think the Fed will do next, not to what the Fed does today. If markets start believing a December rate cut is back on the table, rates should move lower in response.
All in all, rates are still lower than they’ve been for most of the year, aside from the last few weeks. This obviously does not help the housing market, but a small drop wouldn’t have made much difference. It’s just one more reason for buyers to keep waiting on the sidelines.