The Federal Reserve has cut interest rates, but mortgage rates are going up instead. Experts say this is due to the riskier nature of mortgages compared to government bonds.
When the Fed lowers interest rates, it’s expected to have a ripple effect on other markets. However, mortgages follow a different path. The 30-year fixed-rate mortgage averaged 6.09% in September and has risen to 6.72% just three months later, according to Freddie Mac data.
The reason for this disparity lies in the bond market. Mortgages closely track 10-year U.S. Treasury notes, which are traded by investors in the bond market. If investors expect inflation to rise, they want higher yields to protect their investments. However, due to the riskier nature of mortgages, lenders demand more yield and lower prices.
This spread between mortgage rates and bond yields is significant. On September 18, the 30-year fixed-rate mortgage averaged 6.09%, while the 10-year Treasury averaged 4.10%. The gap between these two rates has widened as investors become increasingly cautious.
Inflation has barely budged since last December, making it harder for policymakers to achieve their 2% target. Fed Chair Jerome Powell acknowledged this challenge in a news conference, stating that achieving the goal of 2% inflation “kind of fallen apart as we approach the end of the year.”
Looking forward, there’s no reason to expect the bond market to pick up. Economic growth is expected to remain stronger, which requires higher natural interest rates. However, this hasn’t translated to mortgage rates, which are now at nearly 6.72%.
Mortgage guarantor Fannie Mae recently highlighted investors’ concerns about monetary and fiscal policy, economic growth, and inflation in laying out factors influencing mortgage rates. With rates for home loans having been elevated for two years, investors expect more prepayment risk than usual.
The Fed’s actions have created a period of heightened uncertainty, making it hard to price mortgages. Experts like Selma Hepp, chief economist for CoreLogic, warn that this is not just about interest rate cuts but also the underlying economic environment and debt concerns.
Source: https://eu.usatoday.com/story/money/personalfinance/real-estate/2024/12/19/fed-cutting-why-mortgage-rates-rising/77083169007