LOS ANGELES — Hoping that mortgage rates will keep dropping following the Federal Reserve’s first rate cut since last year? Don’t bank on it.
As expected, the central bank delivered a quarter-point cut Wednesday and projected it would lower its benchmark rate twice more this year, reflecting growing concern over the U.S. job market.
Here’s a look at factors that determine mortgage rates and what the Fed’s latest move means for the housing market:
Mortgage rates have been mostly falling since late July on expectations of a Fed rate cut. The average rate on a 30-year mortgage was at 6.35% last week, its lowest level in nearly a year, according to mortgage buyer Freddie Mac.
A similar pullback in mortgage rates happened around this time last year in the weeks leading up to the Fed’s first rate cut in more than four years. Back then, the average rate on a 30-year mortgage got down to a 2-year low of 6.08% one week after the central bank cut rates.
But it hasn’t come close to that since.
Mortgage rates didn’t keep falling last year, even as the Fed cut its main rate two more times. Instead, mortgage rates rose and kept climbing until the average rate on a 30-year home loan reached just over 7% by mid-January.
Like last year, the Fed’s rate cut doesn’t necessarily mean mortgage rates will keep declining, even as the central bank signals more cuts ahead.
“Rates could come down further, as the Fed has signaled the potential for two more rate cuts this year,” said Lisa Sturtevant, chief economist at Bright MLS. “However, there are still risks of a reversal in mortgage rates. Inflation heated up in August and if the September inflation report shows another bump in consumer prices, it’s possible we could see rates rise.”
No. Mortgage rates are influenced by several factors, from the Fed’s interest rate policy decisions to bond market investors’ expectations for the economy and inflation.
Mortgage rates generally follow the trajectory of the 10-year Treasury yield, which lenders use as a guide to pricing home loans.
That’s because mortgages are typically bundled into mortgage-backed securities that are sold to investors. To keep mortgage-backed securities attractive to investors, their yield — or annual return — is adjusted to be competitive with the yield offered by the U.S. on its 10-year government bonds. When those bond yields rise, they tend to push up mortgage rates, and vice-versa.
The 10-year Treasury yield has been mostly easing since mid-July as growing signs that the job market has been weakening fueled expectations of a Fed rate cut this month.
Until now, the Fed had kept its main interest rate on hold this year because