Why are mortgage rates rising even as the Federal Reserve cuts rates? This week, the 30-year fixed mortgage rate climbed to 6.61%, up 25 basis points from last week’s average of 6.36%. In this video, we will discuss how market forces like bond yields, inflation, and investor sentiment are driving this trend, and what it all means for the housing market.
Eric Andersen, B.A., M.Div.
Owner/Designated Managing Broker, Andersen Realty Group
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Transcript:
In a surprising twist, the thirty year fixed mortgage rate rose to six point six one percent this week, up twenty five basis points from just a week ago—even as the Federal Reserve announced another rate cut. How can mortgage rates rise when the Fed is actively lowering rates? I’m Eric with Andersen Realty Group, and in this video, we’ll look at what’s going on.
When the Fed cuts interest rates, it’s reasonable to expect borrowing costs to drop, including mortgage rates. But that hasn’t been the case, as we saw this past week. Why would mortgage rates go up after a Fed cut? Today, we’ll explore why mortgage rates don’t always follow the Fed’s actions and what this means for the housing market.
This week, the Federal Reserve lowered its benchmark rate by a quarter point. These cuts are designed to make borrowing more affordable. Yet, mortgage rates are climbing instead of falling. For homebuyers, this disconnect can be frustrating, especially when trying to budget for a new home. It’s important to understand that mortgage rates aren’t directly tied directly to the Fed’s rate. Instead, they respond to a wider set of economic forces that go beyond the central bank’s immediate actions.
To understand what’s happening, let’s start with the bond market. Mortgage rates are closely linked to the yield on ten year Treasury bonds, which act as a barometer for long-term expectations about the economy. When investors sense stormy weather coming—things like higher inflation—they demand higher returns on bonds, pushing yields higher. This past week, bond yields went up, and so did mortgage rates.
At the Fed’s December meeting, policymakers announced their third and final rate cut of 2024. But the real headline was their updated projections for 2025. Back in September, the Fed expected to make four rate cuts in 2025. Now, they’re only projecting two, and the markets responded about as well as telling your toddler it’s time for bed. Or no more candy. Or pretty much anything they don’t want to hear.
The Fed was signaling that they plan to keep rates higher. Why? Inflation remains sticky. In November, it came in at two point seven percent, still well above the Fed’s target rate of two percent. Their cautious approach sent a clear message: future rate cuts won’t come as quickly as the markets had hoped. As a result, Treasury yields and mortgage rates moved higher.
What confuses people is that the Federal Reserve doesn’t set mortgage rates directly. They influence them, but they do not set them. While rate cuts lower the cost of short-term borrowing, mortgage rates reflect long-term expectations about inflation, economic growth, and investor sentiment. The Fed’s December meeting signaled a ‘higher-for-longer’ stance, which rattled the bond market and drove yields higher. Mortgage rates are shaped by how the market interprets the Fed’s signals and the broader economic landscape. The Fed’s impact on mortgage rates, then, is indirect.
What does this mean for the housing market? Mortgage rates play a key role in the housing market because they have a direct impact on affordability. When rates rise, monthly payments for new borrowers gets more expensive and reduces how much home they can afford. Imagine a buyer who was approved for a five hundred thousand dollar home when rates were five percent. With today’s higher rates, that same buyer might only qualify for four hundred fifty thousand dollars. Higher rates reduce what buyers can afford, often slowing demand, especially for first-time buyers or those on tight budgets. On seller side, rising rates can discourage homeowners locked into lower-rate mortgages from listing their homes, further restricting inventory. Ironically, then, higher rates can actually increase home values, as limited supply keeps prices elevated.
So to sum up, the recent rise in mortgage rates is a reaction to the Fed’s cautious outlook for 2025 and persistent inflation concerns. Mortgage rates are driven by a number of complex factors, including bond yields and market sentiment, which extend well beyond the Fed’s immediate actions. While the Fed’s rate cuts may dominate headlines, it’s the market’s expectations about the future that determine what will happen with mortgage rates.
What are your thoughts on the Fed’s cautious approach and their impact on mortgage rates? Let me know in the comments. And if you want to stay current on the housing market in Burr Ridge and the western suburbs of Chicago, be sure to subscribe to my channel, turn on notifications, and check out my other videos. I’m Eric with Andersen Realty Group, a family-owned brokerage where we treat our clients like family.