For Jill Comfort, a broker who owns Comfort Realty in Maricopa, Arizona, 2024 has been a slow year.
“The majority of that has to do with interest rates,” Comfort told USA TODAY. “You’ve got a lot of people that are first-time buyers struggling to get into the market. High interest rates are just making their payments go way higher. A lot of people are opting to wait.”
For buyers brave enough to dip their toes in the water, the market has been fickle.
One of Comfort’s clients received an estimate on a mortgage application before the Federal Reserve announced it would start cutting rates. “Then rates started going back up and now her payment is going to be more than when we originally started looking,” she said. “It’s extremely frustrating.”
That experience isn’t a fluke. On September 18, when the Federal Reserve made its first cut of 2024, the 30-year fixed-rate mortgage averaged 6.09%. Three months later, just after the central bank on Wednesday announced its third cut of the year, the federal funds rate is down a full percentage point. Mortgages, meanwhile, are up nearly that much: the 30-year-fixed averaged 6.72% in the week ending December 19, according to Freddie Mac data.
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What’s going on?
Mortgages follow bonds, not bank rates
The Federal Reserve controls the rates at which banks loan money to each other overnight. But mortgages have a much longer lifespan, and as a result they most closely track 10-year U.S. Treasury notes – debt issued by the U.S. government and traded by investors in the bond market.
Mortgage guarantor Fannie Mae recently highlighted “investors’ expectations for monetary and fiscal policy, economic growth, and inflation” in an article laying out factors influencing rates for 10-year Treasury notes.
If investors expect inflation to be higher, for example, investors will want higher yields so their investments don’t lose value. It’s also the case that when inflation goes higher, the risk that interest-paying investments will lose value makes their prices decline. Bond prices decline when yields rise, and vice versa.
Why are mortgage rates higher than bond yields?
While mortgages go in the same direction as the bond market, there is still a big “spread,” or difference between the two. On September 18, when the 30-year fixed-rate mortgage averaged 6.09%, the 10-year Treasury averaged 4.10%.
Mortgages are much riskier investments than debt issued by the government of the largest economy in the world. Individual homeowners can and do default regularly.
Mortgages are also riskier because homeowners have the ability to refinance whenever they want, for any reason, with no penalty. Investors and institutions that buy mortgages and mortgage bonds have no guarantee that they’ll be able to count on constant cash flows from those financial products, so they demand more yield – and lower prices, as described above – to buy them.
But mortgage rates aren’t even staying the same – they’re rising
In short, that’s because risks are rising.
“Inflation has barely budged since last December, it means that this last mile will indeed be much more difficult than many predicted,” said Selma Hepp, chief economist for CoreLogic.
The Fed has made significant progress in taming runaway inflation, but finally touching its 2% target will be hard. Policymakers acknowledged as much Wednesday when they forecast fewer rate cuts in 2025 than previously expected.
“Inflation has been moving sideways,” Fed Chair Jerome Powell said at a news conference, adding that achieving the goal of 2% inflation has “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, Hepp said. “It’s the concern about the debt and the deficit, but also we are in a environment where economic growth is looking like it’s going to remain stronger. And that requires a higher natural rate of natural interest rates.”
Mortgages, meanwhile, have their own concerns: with rates for home loans having been so elevated for such an extended period over the past two years, investors have every reason to expect more prepayment risk than usual, Hepp noted.
“We’re in a period of heightened uncertainty,” Hepp said. “It’s hard to price mortgages when you have so little certainty.”
