Why Mortgage Rates Aren't Going Down Like You Hoped

It's no secret that many of us were hoping for lower mortgage rates, but unfortunately, that's not happening anytime soon. The truth is, mortgage rates are influenced by a complex mix of economic factors.

In recent years, the Federal Reserve has been raising interest rates to combat inflation, which has had a ripple effect on mortgage rates. This means that even if the Fed were to lower rates, it wouldn't necessarily translate to lower mortgage rates for consumers.

The current state of the economy, including a strong job market and rising wages, is also contributing to higher mortgage rates. As a result, many lenders are being cautious and keeping their rates higher to account for the increased risk of lending.

Mortgage rates aren't falling anytime soon, unfortunately for prospective homebuyers. Don't expect mortgage rates to drop below 5.5% soon.

The Federal Reserve's base case assumes an economic soft landing for the economy, which will keep interest rates from falling drastically. This means mortgage rates will likely stay above the "magic mortgage rate" through 2025.

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Getting mortgage rates below 5.5% would require a significant deterioration in the labor market, necessitating more dramatic rate reductions from the Federal Reserve. This is not the base case, so mortgage rates will likely stay elevated.

Homebuilders can take advantage of today's rates by offering incentives like rate buydowns and closing cost contributions. Expect homebuilders to continue offering these deals to prospective buyers as long as rates stay elevated.

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Thinking from the investor's perspective can be a game-changer in understanding why mortgage rates aren't falling as much as Treasury yields.

If you put yourself in an investor's shoes, you'll realize that they're not just looking for a good return on investment, but also want to minimize risk. During times of crisis, like terrorist attacks, wars, or health pandemics, investors become risk-averse and want to pay a lower premium for mortgage-backed securities.

This is because a refinance boom creates underperformance or losses for their existing book of mortgage-backed securities, as more of them get paid off through refinancing. As a result, investors are less willing to pay for mortgages.

As the premium investors are paying goes down, the price for borrowers goes up, slightly, in either up-front costs or higher interest rates.

Mortgage rates aren't likely to drop below 5.5% anytime soon, according to experts. This is because a significant softening in the labor market would be needed to warrant more dramatic rate reductions from the Federal Reserve.

The Federal Reserve's base case assumes an economic soft landing, which will keep interest rates, and mortgage rates, from falling drastically. This view also feeds into the expectation of modest growth for housing in 2025.

Mark Zandi, chief economist for Moody's, expects the fixed rate to be near 6% at the end of this year and closer to 5.5% by the end of next year. Long run, it should settle between 5.5% and 6%.

The average 30-year fixed mortgage rate was 2.88% with 0.7 points in September 2021, but rates aren't likely to tumble much from here soon.

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Mortgage rates are influenced by the federal funds rate, which is set by the Federal Reserve. The federal funds rate has been kept relatively high since 2015, which has contributed to higher mortgage rates.

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The spread between the federal funds rate and mortgage rates is typically around 2-3 percentage points. This means that even if the federal funds rate were to decrease, mortgage rates might not follow suit immediately.

A 1% decrease in the federal funds rate could lead to a 0.25-0.5% decrease in mortgage rates, but this is not a direct correlation. The actual impact on mortgage rates depends on various market and economic factors.

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Mortgage rates aren't falling as fast as US Treasury yields because of risk. This risk is felt by investors of mortgage-backed bonds, who pay a premium for those bonds and expect to recoup that and more over time.

These investors are essentially betting on borrowers paying interest for a long time, but when mortgage rates drop, the premium shrinks or the mortgage is refinanced, and they lose out.

As a homeowner, you might want to pay down your mortgage faster or refinance if you see mortgage interest rates drop, but that's exactly what hurts the investors who bought your mortgage.

Investors who pay points to get a lower rate are essentially taking a risk that you'll sell the home or pay off the mortgage before the breakeven point, and that's why I prefer a "no-cost refinance".

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Mortgage rates fell by roughly 60 bps from the beginning of August through the end of September, finishing the month close to 6.0%.

Strong employment data released on October 4 revealed that the US economy added 254,000 jobs in September, pushing up mortgage rates.

Good news for the economy is bad news for prospective homebuyers, as the Fed's rate cut was predicated on a labor market that was showing signs of softness.

The labor market appeared stronger than many anticipated, combined with upward revisions to August and July data.

Investors expected the Fed to continue cutting interest rates into early 2025 to fend off deterioration in the labor market and stimulate the economy.

The new uncertainty around the timing of rate cuts pushed up rates for long-term debt, sending mortgage rates closer to 6.6%, a ~50 bps increase from late September.

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The editors at our financial publication have curated a selection of the most insightful articles on why mortgage rates aren't going down. Here are their top picks:

The Federal Reserve has been keeping interest rates low for a while now, but that doesn't necessarily mean mortgage rates will follow suit. According to our article, the Fed's decisions only affect short-term rates, not long-term rates like mortgages.

In fact, the article explains that long-term rates are influenced by the bond market, which has been experiencing a surge in demand, driving up prices and yields. This has led to higher mortgage rates.

Meanwhile, the article highlights that the economy is still recovering from the pandemic, and investors are seeking safe-haven assets like bonds, further driving up demand and rates.

The article also notes that the government's fiscal policies, such as the large budget deficits, have contributed to the rise in long-term interest rates.

Our editors recommend keeping an eye on the bond market and the Fed's future decisions, as these will likely continue to impact mortgage rates.

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There are different types of homebuyers with varying mortgage rates.

Some homebuyers are seeing mortgage rates in the 5.5% to 5.75% range, which is below the 6.09% average rate often quoted.

Homeowners with mortgages at 6.5%, 7%, or 7.5% may be able to save money by refinancing now.

On the other hand, homeowners with mortgages in the 3% range may want to hold on to them, but still take advantage of lower rates to tap into equity.

The average homeowner in the U.S. gained about $28,000 in equity in the past year, while Michigan homeowners gained $20,000 and California homeowners saw the largest average equity gain at $64,000.

Homebuyers need to carefully consider their situation and whether refinancing is a good option for them.

The Fed rate announcement can drive people to re-evaluate their current mortgage situation and explore options.

A different take: Mortgage Rates Have Ticked Back down to below 7