For many Americans, the Federal Reserve’s decision to cut interest rates sparked hope that mortgage rates would follow suit, making homeownership more affordable. However, reality has painted a different picture: mortgage rates have actually increased. Despite multiple rate cuts from the Fed, the average 30-year fixed mortgage rate climbed from around 6.1% in September to approximately 6.7% by December 2024. So, what’s causing this puzzling disconnect?
How Mortgage Rates Really Work
Mortgage rates are primarily influenced by the 10-year Treasury yield, not directly by the Fed’s benchmark interest rate. The 10-year Treasury yield reflects investor expectations about future economic conditions, inflation, and the Federal Reserve’s policy direction. If investors expect inflation to remain high or economic policies to drive higher deficits, Treasury yields – and consequently, mortgage rates – rise.
Jessica Lautz, deputy chief economist at the National Association of Realtors, explained, “The market is just responding to the tone of the Fed’s message.” When the Fed signals caution about future rate cuts or suggests inflation might remain sticky, bond markets respond with higher yields, which pushes mortgage rates higher.
When the Fed cuts interest rates, it lowers the cost of borrowing for short-term loans, but mortgage rates depend on long-term financial outlooks. If investors believe inflation will persist or economic conditions will stay strong, they demand higher yields on long-term bonds to compensate for future risk.
Why Are Mortgage Rates Still Rising?
Several factors are contributing to stubbornly high mortgage rates:
- Inflation Remains Sticky: Inflation has stalled above the Fed’s 2% target, with recent data showing less progress toward reducing price growth. Persistent inflation keeps bond yields – and thus mortgage rates – elevated.
Federal Reserve Chair Jerome Powell acknowledged this challenge, stating, “Today was a closer call, but we decided it was the right call because we thought it was the best decision to foster achievement of both of our goals, maximum employment and price stability.”
- Economic Policy Uncertainty: Policies proposed by President-elect Donald Trump, such as broad tariffs and tax cuts, are viewed as potentially inflationary. If these policies increase deficits or drive up costs, mortgage rates may remain high.
Beth Ann Bovino, chief economist at U.S. Bank, explained, “While there is uncertainty on the extent of the inflation impact of Trump’s policies, higher inflation expectations tend to lead to higher bond yields and mortgage rates.”
- Investor Sentiment: Investors are demanding higher returns on long-term Treasury bonds due to concerns about inflation, rising government debt, and economic volatility. These higher yields directly influence mortgage rates.
Melissa Cohn, regional vice president at William Raveis Mortgage, added, “That, in conjunction with Trump’s desired policies on tariffs, immigration and tax cuts—which are all inflationary—spooked the bond market.”
What Does Fed Chairman Powell Say About This?
Federal Reserve Chair Jerome Powell acknowledged the complexity of the current economic landscape. While the Fed has cut rates multiple times, Powell has signaled caution about future cuts due to persistent inflation and economic uncertainty. He emphasized that the Fed’s role is to balance economic growth with price stability, and future decisions will depend on inflation trends and labor market data.
“We see the risks as two-sided,” Powell said. “Moving too slowly could needlessly undermine economic activity and the labor market, while moving too quickly could undermine our progress on inflation.”
Powell also noted that the Fed does not directly control mortgage rates, as they are set by market forces and investor sentiment. The central bank’s role is more about influencing overall economic expectations, which indirectly affects Treasury yields and mortgage rates.
Is It a Good Time to Buy a House?
The answer depends on individual financial circumstances. Mortgage rates are expected to remain in the mid-6% range throughout 2025, with some experts predicting fluctuations between 5.75% and 7.25%. Waiting for significantly lower rates may not be realistic, as major drops are usually tied to severe economic downturns.
Lisa Sturtevant, chief economist at Bright MLS, summed up the situation by saying, “Sixes are the new normal.” Buyers hoping for rates to return to pandemic-era lows may be disappointed.
Instead of trying to time the market, prospective buyers should focus on factors they can control:
- Save for a Larger Down Payment: This can lower your mortgage rate and reduce overall costs.
- Improve Your Credit Score: Higher credit scores generally qualify for better mortgage rates.
- Understand Your Budget: Ensure that monthly mortgage payments fit comfortably within your financial plan.
Expect This
The housing market remains constrained by limited inventory and high prices, even as mortgage rates hover at elevated levels. While rates could dip slightly in 2025 if inflation cools and economic growth slows, significant relief may remain elusive.
Mike Fratantoni, chief economist at the Mortgage Bankers Association, predicted, “Rates will remain within a fairly narrow range over the next year, with mortgage rates moving higher on signs of economic strength and more stimulative fiscal or monetary policy, or lower if it’s the opposite.”
Ultimately, the decision to buy a home shouldn’t hinge entirely on mortgage rates. Financial preparedness, stable income, and long-term housing needs are far more important factors in determining whether it’s the right time to buy.
In a world of economic uncertainty and mixed signals from the Federal Reserve, one thing remains clear: the housing market is in for a bumpy ride, and prospective buyers must stay informed and adaptable.
FAM Editor: In normal times the reaction to higher rates would be either lower house prices or a slowdown in the market. I wouldn’t want to bet on either at this time.
But then again, if you plan to stay in a house and can afford the payments, then do it. Even in a market crash you will be able to out-wait any losses. You will be building equity, and there may be a chance in the future to re-finance and nail down lower interest rates.