Consumers have been eagerly awaiting interest rate cuts for several years, hoping the cuts would translate to a reduction in mortgage rates. When the Fed finally slashed interest rates by 0.5% in September, many were hopeful it would signal the end of a gridlocked housing market.
However, mortgage rates have steadily risen since mid-September, even after another 0.25% interest rate cut last week. This is not the relief prospective home buyers were hoping for and is counterintuitive to how people expect interest rates to influence mortgage rates.
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Still, it’s typical for there to be a lag between when interest rates are cut and when mortgage rates start to decline.
Most housing experts estimate these interest rate cuts will translate into lower mortgage rates sometime during the first quarter of 2025. Whether that prediction comes true depends on how inflation trends play out next year.
With the new presidential administration taking over in January 2025 and promising to make sweeping policy changes — many of which are projected to increase inflation — it’s unclear what future Fed policy will look like.
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Housing inventory is increasing, easing competition
The number of homes for sale increased almost 30% year-over-year from October 2023, reaching the highest inventory level since 2019. Housing supply has been one of the main factors driving demand and competition, locking many potential buyers out of the market.
The average time spent on the market rose to 58 days in October, an increase of 8 days when compared to last year. Houses are gradually taking longer to sell, an indicator that competition is easing and buyers are regaining their footing in the market.
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However, mortgage rates rose seven basis points to 6.79% last week, marking the sixth consecutive week of increases. This signifies a 0.7% increase in 30-year mortgage rates since the Fed’s first interest rate cut in September.
Mortgage applications fell 7% last week, and Redfin’s Homebuyer Demand index also fell from recent highs, though both metrics are up considerably year-over-year. This suggests buyers may be temporarily discouraged by increasing mortgage rates, but the housing market is improving overall.
The weeks of consistent mortgage rate increases are closely tied to the 10-year Treasury Yield, which has steadily risen over the past six weeks.
Mortgage rates are increasing with treasury yields and strong economic performance
Mortgage rate hikes have been attributed to an increasing 10-year Treasury Yield — the interest rate the US government pays to borrow money for ten years and a key indicator of investor sentiment — and a strong October Jobs Report.
Related: Dave Ramsey bluntly speaks on interest rates and mortgages
The treasury yield increased from 3.62% on September 15th to 4.47% on November 12th, bumping up 30-year fixed mortgage rates from 6.08% to 6.79% in the last month. Higher yields typically indicate that investors see economic growth or higher inflation on the horizon.
There has historically been a 1-3% spread between the treasury yield and mortgage rates, but they both move in the same direction. When the treasury yield increases, so do mortgage rates, making it far more influential than the federal funds rate.
A strong labor market is typically a sign of a booming economy. However, it also increases consumer spending and the Fed's likelihood of raising interest rates.
Despite these factors, most housing experts expect a notable decline in mortgage rates in early to mid-2025. However, this will hinge on whether inflation continues to fall or begins to tick up with a new Presidential administration.
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