Fed rate cuts influence, recent developments suggest that the Federal Reserve's rate cuts may not be having the desired effect, as U.S. mortgage rates have surged to an eight-month high.
Despite the Federal Reserve’s cumulative rate cuts of 1%, mortgage rates have risen by the same magnitude.
Latest data indicates that U.S. mortgage rates have surpassed 7%, reaching their highest level since early May of last year, continuing a months-long upward trend. This increase may place significant pressure on potential homebuyers already facing rising home prices and limited inventory, further suppressing the U.S. real estate market.
According to the Mortgage Bankers Association (MBA), the contract rate for 30-year fixed mortgages rose by 10 basis points to 7.09% for the week ending January 10. This marks the fifth consecutive week of increases, pushing major housing loan rates nearly one percentage point higher than when the Fed began cutting rates in September last year.
It’s noteworthy that the Fed’s policy rate is now a full percentage point lower than it was at that time, yet mortgage rates are moving in the opposite direction. This is because mortgage rates closely track U.S. Treasury yields. On Tuesday, the yield on the 10-year Treasury note climbed to its highest level since October 2023. Since mid-December, borrowing costs have risen significantly due to strong U.S. economic performance, reduced likelihood of further Fed rate cuts, and market concerns that Trump’s policies may lead to persistent inflation.
President-elect Trump has taken office, with an economic agenda that includes extending the tax cuts from 2017, which is expected to add trillions to government debt. Last year, the U.S. budget deficit exceeded $1.8 trillion, the highest level outside the pandemic. Amid concerns about stalling progress toward the 2% inflation target and uncertainty over how Trump’s policies—such as increased tariffs and immigration restrictions—will impact the economy, the Fed has indicated that it will slow the pace of rate cuts this year.
High housing financing costs and still elevated home prices are jointly affecting affordability, deterring potential buyers. Many believe that the resilience of the U.S. economy amid the most aggressive monetary tightening in 40 years is partly due to homeowners locking in ultra-low mortgage rates, thus becoming "immune" to the Fed’s policy impacts. However, this is not the case for new homebuyers.
Predictions regarding interest rates decreasing in 2025 seem to be shifting, with experts now forecasting a slowdown in rate decreases, but not necessarily a significant drop. This could mean that housing affordability remains a persistent issue into 2025.
Greg McBride, Chief Financial Analyst at Bankrate, stated:
“30-year fixed mortgage rates will average around 6% for most of the year, briefly spike above 7%, but will never fall below 6%. Ongoing economic growth and concerns about inflation and government debt will keep mortgage rates elevated.”
However, according to the National Association of Realtors (NAR), the housing inventory in the U.S. has recently improved, with supply satisfying 3.8 months of demand as of the end of November 2024. While this is still below the 5 to 6 months typically needed for a balanced market, it represents a significant 17.7% increase compared to a year ago.
NAR’s data on existing home sales showed the first increase since 2021 last fall. While many buyers in 2024 expect mortgage rates to decrease, they remain cautious, suggesting that attitudes may be shifting.
NAR Chief Economist Lawrence Yun remarked:
“Home sales momentum is strengthening. With the economy continuing to add jobs, increased housing inventory compared to a year ago, and consumers adjusting to a new normal of mortgage rates between 6% and 7%, more buyers are entering the market.”
Despite this, buying a home in 2025 may still be difficult. Selma Hepp, Chief Economist at CoreLogic, stated:
“The outlook for rising mortgage rates in 2025 suggests that real estate market activity will continue to face challenges. The ongoing lack of affordability and the lock-in effect will keep sellers on the sidelines.”
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