Unlocking Homeownership: How the Fed’s Rate Cut Could Lower Your Mortgage Rates

LOS ANGELES (AP) — The recent cut in mortgage rates by the Federal Reserve might have some wondering if rates will keep falling. However, it’s important to approach this with caution.

The Fed announced a quarter-point cut, with plans for more adjustments this year. Their concern? The job market isn’t looking great.

What Happens to Mortgage Rates Now?

Since late July, mortgage rates have been on a downward trend, largely due to expectations around the Fed’s decisions. Currently, the average rate for a 30-year mortgage stands at 6.35%, the lowest point in nearly a year. Interestingly, this drop mirrors last year’s scenario, which saw rates also dip before the Fed’s first cut after four years. Back then, the rate hit a two-year low of 6.08% shortly after the Fed made its move.

But what happened next? Despite further Fed rate cuts, mortgage rates didn’t continue to slide. In fact, they rose, peaking above 7% by mid-January of the following year.

Experts warn that while the Fed’s recent cuts might suggest lower mortgage rates, it doesn’t guarantee a continued decline. “Rates could come down further, but we also have to be cautious,” says Lisa Sturtevant, chief economist at Bright MLS. If inflation spikes, mortgage rates might reverse course.

Who Sets Mortgage Rates?

It’s a common misconception that the Fed directly sets mortgage rates. In reality, rates are influenced by many factors, including expectations surrounding the economy and inflation. They closely follow the yield on 10-year Treasury bonds, which lenders use as a benchmark. When the yield rises, mortgage rates typically climb as well.

The 10-year Treasury yield has been dropping recently due to signs that the job market is weakening. The Fed, which previously hesitated to cut rates due to fears of rising inflation, is now trying to balance stimulating the economy and managing price increases. If inflation continues to rise, mortgage rates might also follow suit.

Danielle Hale, chief economist at Realtor.com, emphasizes that future expectations about economic growth and labor markets also play a critical role in shaping these rates.

Where Are Mortgage Rates Going?

Experts have mixed opinions about the future of mortgage rates. “Even if the Fed lowers rates, it doesn’t guarantee mortgages will continue to drop,” says Stephen Kates, a financial analyst at Bankrate. He points out that while trends might suggest a reduction, it’s not a clear-cut path.

Market researchers had expected more aggressive cuts from the Fed, but recent projections indicate a slower pace. This disconnect between market expectations and the Fed’s stance could lead to upward pressure on mortgage rates. Hale anticipates that the average 30-year mortgage rate will remain between 6.3% and 6.4% by the year’s end, without dipping below 6%.

Impact on the Housing Market

The drop in mortgage rates has brought some much-needed relief to the housing market, which has faced challenges since 2022 when rates began to climb. Sales of existing homes fell to their lowest level in nearly 30 years last year and continued to struggle this year.

While lower rates can boost buyer purchasing power, many still find homes unaffordable due to rising prices—up roughly 50% since 2010. Sturtevant notes, “While lower rates may entice some buyers, it won’t be enough to fully reopen the housing market.”

If mortgage rates continue to decline, buyers might find it easier to finance homes. However, fewer sellers might mean a more competitive market, making it tougher for buyers.

Should You Buy or Refinance Now?

Timing the mortgage market can be tricky. Home buyers who find a property they like should consider moving forward rather than waiting for rates to drop further, according to Kates. Many homeowners have already jumped on refinancing opportunities with the recent dip in rates, spiking refinance applications.

A good principle for refinancing is to aim for a reduction of at least one percentage point in your current rate, which can help offset any fees.

In short, while mortgage rates might be falling currently, many factors will influence their trajectory. Keeping an eye on economic trends and inflation is essential for anyone looking to buy or refinance.

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Economic policy, Mortgages, Federal Reserve System, General news, Business, U.S. news, Danielle Hale, Lisa Sturtevant, Stephen Kates, Inflation, U.S. News