Housing market outlook: Mortgage rates to stay around 6%

Before the Fed cut interest rates, mortgage interest rates had dropped dramatically near what some considered the “magic number” of 6% which would revive a sluggish housing market characterized by low inventory and the foreclosure effect.

Since the central bank unveiled this long-awaited cut last month, mortgage interest rates have risen along with longer-term Treasury yields.

To be sure, the Fed’s cuts do not mean mortgage interest rates suddenly fall, because the latter follow the expected path of policymakers rather than their actual moves.

But in recent weeks, Fed officials and economic data have dampened hopes for a strong monetary easing cycle.

First, when the Fed cut interest rates, it also released officials’ economic forecasts that included what’s called a dot plot of where they see interest rates going. This leans towards slightly less easing than the market expected.

Then, during his subsequent news conference, Fed Chairman Jerome Powell said that a large half-point cut did not necessarily indicate the pace of future cuts, adding that policy would still depend on the data.

A week later, Powell warned that Fed officials were in no rush to cut interest rates further. Finally, Friday’s blockbuster jobs report pointed to an economy that remains strong and needs plenty of workers demanding higher wages.

Wall Street analysts lowered their expectations for Fed rate cuts, and the 10-year bond yield rose 12 basis points to 3.971%. The data was such a big shock that some forecasters said the Fed would have to temporarily stop cutting interest rates to avoid accelerating inflation.

Mortgage rates have followed rising Treasury yields. According to Daily Mortgage NewsThe average 30-year fixed rate rose 27 basis points on Friday alone to 6.53%, which is also 42 basis points higher than it was on September 17 — just before the Fed cut interest rates.

In a Statement after jobs reportMortgage Bankers Association Chief Economist Michael Fratantoni warned that the data could slow the expected pace of Fed rate cuts as inflation may not continue to slow in a straight line.

“The MBA’s forecast is that long-term interest rates, including mortgage rates, will remain within a relatively narrow range over the next year,” he added. “This news will push mortgage interest rates to the top of this range, but we expect mortgage interest rates to remain close to 6% over the next 12 months.”

Even before the jobs report, other housing market forecasts were not so optimistic about activity and mortgage rates.

Days after the Fed’s meeting, the mortgage giant Freddie Mac released its monthly forecastHe expects mortgage rates to decline further, but will still be above 6% by the end of the year.

While demand should rise, sales will not get much of a boost as affordability will only improve modestly while the lock-in effect will continue to impact inventory.

“Unless interest rates fall significantly — something on the order of a full percentage point or more — we do not expect existing home inventory to come to the market in significant numbers, limiting supply,” Freddie Mac said. “We expect home sales to remain depressed in 2024 and 2025.”