Recently, there has been a lot of speculation surrounding the direction of mortgage rates.
I’ve also been involved in this a lot as I try to decide what’s next for pricing.
Despite the recent increase in the 30-year fixed rate from around 6% to 7%, I remain optimistic that this rate remains on a downward trend.
In fact, I haven’t changed my view since rates started falling about a year ago when they appeared to have peaked at 8%.
Many economists and other pundits have flip-flopped since the Fed first cut interest rates in September, but that may be a mistake.
Mortgage rates tend to fall before the first Fed rate cut
First Fed rate cut this cycle It happened On September 18, the Fed chose to cut the federal funds rate by 50 basis points.
This was the “pivot” after the Fed raised interest rates 11 times starting in early 2022 to combat inflation.
The reason they finally turned around after increasing interest rates so much was because they felt that inflation was no longer a major concern, and that keeping interest rates higher for longer could affect employment.
they Dual mandate Most important is price stability and maximum sustainable employment, which could suffer if monetary policy remains too restrictive.
Anyway, that led to the first interest rate cut and, to everyone’s surprise, the 30-year fixed rate has risen by about a full percentage point since then, as shown in the chart from Multinational Division above.
Many people believe that the Fed controls mortgage interest rates, so home loan interest rates will also fall when it “lowers” them.
It’s an old myth that has proven difficult to shake, but the recent movement in mortgage rates may have finally put that myth to rest.
After all, the 30-year fixed yield was at about 6.125% on September 18, and quickly rose to a high of 7.125% in early November.
So maybe people will stop believing that the Fed controls mortgage interest rates.
However, mortgage rates tend to move in the same general direction as the federal funds rate.
Why? Because although the short-term interest rate is a short-term interest rate, and the 30-year fixed interest rate is clearly a long-term interest rate, lowering interest rates by the Fed usually signals future economic weakness.
Weakness means a flight to safety, also known as investing in bonds, which increases their price and reduces their return (interest rate).
Mortgage rates reacted fairly normally to the Fed’s interest rate pivot
Check out this chart from Freddie Macwhich details mortgage rate movement 12 weeks before and 12 weeks after the first Fed rate cut.
Although it seems that 2024 is not normal, when you take into account that interest rates fell by about 80 basis points before the cut, the recovery was not completely unexpected.
Because so much of the cuts are included in the Fed’s decision, interest rates often bounce slightly once the news is delivered. It’s a classic buy the rumor, sell the news event.
Also keep in mind that the strong jobs report was released shortly after the Fed’s policy decision, which had a significant impact on interest rates.
So it also depends on what’s happening around the same time. What if the jobs report is weaker than expected? Where will we be today?
However, there have been instances in the past where mortgage rates followed a similar path, including 2020 and 1998.
In many years with the pivot, mortgage rates increased for a short period before they began to fall again.
But more importantly, mortgage rates always go down, leading to a pivot. There has always been a pre-pivot movement downwards.
It’s simply that mortgage interest rates favor the expectation that the Fed will pivot, which explains why 30-year fixed rates fell again this year from 7.5% in May to 6.125% in September.
Will mortgage rates get back on track as they were in the past?
Using the chart above, we can see that the 30-year fixed rate is still significantly higher than it was before the Fed rate cut.
But over the past two weeks (shown in the first chart), interest rates have eased slightly. The 30-year yield peaked at 7.125% and has since fallen to about 6.875%.
So it got about 25 basis points from its higher move and could be due for more.
It will be about 12 weeks since the Fed’s shift two weeks from now, so we’re running out of time to get it all back.
However, history shows that mortgage interest rates tend to return to at least the levels of the first Fed rate cuts in just three months.
It will often move lower than that, if any of the other pivots seen in the past are any indication.
This does not mean that history always repeats itself, but it would be surprising if interest rates do not return to the low 6% range again soon, simply matching the levels seen in mid-September.
It would also not be a shock if it moved lower than that over time, perhaps to the 5% range and beyond.
Again, if you look at the chart, it will often continue to decline. But all of this will depend on the economic data that is released, including the always important jobs report on Friday.
What makes things even more uncertain is the incoming administration and its plans, which has put interest rates in a bit of a tailspin, and could explain why they have been rising so much recently.
Read on: What will happen to mortgage rates under Trump’s second term?
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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