According to data provided by Zillow to BW, the average rate on the 30-year fixed-rate mortgage increased by two basis points to 6.35% in the week ending Sept. 25. A basis point represents one one-hundredth of a percentage point.
This marks a significant shift from the previous two weeks, which saw double-digit basis point decreases leading up to the Federal Reserve’s September meeting.
The Fed lowered the federal funds rate, yet mortgage rates are on the rise — what’s the reason?
While the Federal Reserve does not directly control mortgage rates, APRs typically move in the direction that lenders anticipate the federal funds rate to go. Mortgage rates decreased last week as lenders were confident that the Federal Reserve would decide to reduce the federal funds rate.
In fact, the average 30-year APR dropped to just above 6% on September 16, the day before the announcement was made — a level not seen in nearly a year.
As predicted, the Fed cut rates by 25 basis points. However, mortgage rates are now climbing again. Why are lenders raising mortgage rates if the Fed’s actions were as expected?
Mortgage rates are influenced by various economic factors, with lenders reacting retroactively to new data and looking ahead to projected information. In the case of the Fed meeting, it was not likely that rates would immediately decrease post-announcement because lenders had already lowered them in anticipation of the committee’s decision.
Currently, mortgage rates are on the rise mainly due to the increase in the 10-year treasury bond yield even after the Fed’s rate cut. While the federal funds rate’s direction can impact mortgage rates, bond yields provide a clearer indication.
Treasury bonds are viewed as a more secure investment compared to stocks and other higher-risk financial products because they are government-backed. A higher yield indicates falling bond prices, which occurs when investors are optimistic about the economy (including the real estate sector) and are not turning to treasury bonds as a safe option.
This leads us to an economic paradox. When mortgage rates are expected to decline, investors believe the market will improve as more individuals will buy homes. This economic confidence can drive up bond yields, subsequently pushing mortgage rates higher. It’s not a flawless system by any means.
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Existing home sales remained steady, with optimistic market outlook
Data released by the National Association of Realtors (NAR) on Sept. 25 indicated that existing home sales in August maintained a similar pace to July, with a marginal 0.2% decrease month-over-month. Year-over-year, sales increased in the Midwest and South, but declined in the Northeast and West.
Despite this, NAR’s chief economist Lawrence Yun expressed optimism for the future. In a press release, he mentioned, “Mortgage rates are dropping, and more inventory is entering the market, which is expected to boost sales in the upcoming months.”
Yun also highlighted the “record-high stock market,” suggesting that some current homeowners may have enhanced financial stability and flexibility to upgrade, stimulating activity in the high-end property market.
However, Yun acknowledged the limited availability of “affordable” homes for buyers (noting that the median home price last month exceeded $400,000).
Homeowners with moderately priced homes may find current APRs significantly higher than their existing rates, making a move unaffordable or unwarranted. If rates do decrease substantially in the coming months, average homeowners may finally experience the mobility that wealthier buyers have enjoyed.
If rates reach a level that suits your budget, don’t wait for a Fed announcement to begin your mortgage search. Lenders will already be focused on the next economic forecast by then.