Why The Fed's Rate Cuts Won't Mean Major Mortgage Relief – Expect 5.7% At Best, According To Industry Leader

The Federal Reserve’s recent interest rate cut has sparked optimism about potential relief for homebuyers, but industry experts caution against expecting a sharp drop in mortgage rates.

According to Chen Zhao, Redfin’s lead economic analyst, despite the Fed’s actions, mortgage rates are unlikely to fall below 5.7% in the near term.

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Likewise, Logan Mohtashami, HousingWire’s lead analyst, predicts that 30-year mortgage rates could settle as low as 5.75% by the end of this year. According to Mortgage News Daily, the average 30-year conforming loan rate currently sits at 6.21%.

The relationship between Fed rate cuts and mortgage rates is more complex than many realize. While the Fed controls the overnight lending rate for banks, mortgage rates are long-term interest rates set by bond markets.

Those rates often move in anticipation of Fed actions and can be influenced by various economic factors beyond the central bank’s direct control.

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Two key components determine how Fed actions translate to mortgage rates – the yield curve and the mortgage spread. The yield curve represents the difference between long-term rates like 10-year Treasury yields and short-term rates. The mortgage spread accounts for the additional risk associated with mortgages compared to Treasury bonds.

As the Fed cuts rates, long-term Treasury yields are likely to fall less than short-term rates, potentially resulting in long-term rates being higher than short-term rates, according to Redfin. Simultaneously, the difference between mortgage rates and long-term Treasury yields is expected to decrease.

Those factors combined suggest that while mortgage rates may decline, the drop will be much smaller than the Fed Funds rate reduction.

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The labor market’s strength is another factor in determining how low mortgage rates can go. Kevin Ryan, CFO of Better, noted in an interview with HousingWire that Fed policymakers are more concerned with the labor market than inflation. “The Fed presumably will continue to stay data-dependent within this recalibration thing,” Ryan said. “I see a slowly thawing housing sector. If you wake up in 18 months, you’re going to have rates materially lower.”

The recent downward trend in rates has positively impacted the housing market, with purchase applications rising for four consecutive weeks. However, the effect on home sales has been mixed. While new home sales are trending upward, existing home sales continue to struggle, falling 2.5% month-over-month in August, according to the National Association of Realtors.

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Noah Rosenblatt, co-founder of real estate analytics firm UrbanDigs, warns that the housing market has yet to stabilize fully. “We still have election uncertainty, local policy uncertainty and geopolitical uncertainty that are weighing on investors’ and buyers’ minds and could dampen the depth and duration of this recovery,” Rosenblatt told HousingWire.

While some relief may be on the horizon for homebuyers, the road to much lower mortgage rates appears longer than many had hoped.

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