The Federal Reserve (also known as the Fed, America's central bank) has cut interest rates several times this year, with the most recent cut occurring in December. Since the beginning of 2024, the Federal Reserve has lowered the benchmark rate by a full percentage point. However, mortgage rates have risen, frustrating homebuyers and baffling many observers.
Mortgage Rates Follow Bonds, Not Fed Rates
The Federal Reserve directly controls short-term interest rates, but mortgage rates are largely influenced by the yields on 10-year U.S. Treasury notes. U.S. Treasury notes are a type of government bond that is used to borrow money from investors. In return, the government will repay the loan amount, along with interest, over a set period. Treasury yields often reflect what investors anticipate for inflation, economic growth, and monetary policy. When these yields increase, mortgage rates usually go up as well.
Why The Bond Market Is Nervous
Several factors have contributed to volatility in the bond market, including concerns about inflation. Although the U.S. annual inflation rate is moving in the right direction, it is still above the Federal Reserve's target of 2%. Many investors worry that it will be difficult to bring it fully under control, particularly since the economy continues to grow at a strong pace. Government policies, such as tariffs, tax cuts, and tighter immigration rules, can push the inflation rate further upwards. Rising federal debt and growing budget deficits have made investors increasingly cautious, which has placed upward pressure on bond yields.
Why Mortgage Rates Are Higher Than Treasury Yields
Mortgage rates tend to follow the same general direction as Treasury yields, but they come with an added "spread" to account for higher levels of risk. Mortgages carry more risk compared to government bonds for several reasons, including that homeowners may miss payments or default, making mortgages less secure than U.S. Treasury bonds. When mortgage rates are high, these risks are more pronounced. To compensate for this, investors require higher returns, which has widened the gap between Treasury yields and mortgage rates.
Challenges For Homebuyers
Many Americans who want to buy their first home may be unable to do so now because of rising mortgage rates. When the mortgage rate goes up, so do monthly installments (repayments). In a USA Today article, writer Andrea Riquier quotes Jill Comfort, a real estate broker in Arizona, who said the following about first-time buyers, "High interest rates are just making their payments go way higher. A lot of people are opting to wait." Both buyers and sellers often find this unpredictability frustrating. A sudden rise or drop in rates can mean that one day you're a serious contender in the housing market, and the next, you're priced out.
Looking Ahead
Economic and market uncertainty doesn't appear to be letting up anytime soon. Experts warn that factors like inflation, rising government debt, and strong economic growth could keep mortgage rates high for the foreseeable future. If you are navigating today's housing market in the United States, you need to have an abundance of patience and careful financial planning. Although the Federal Reserve's moves suggest that borrowing costs could ease in the long run, the gap between short-term rate cuts and rising mortgage rates underscores just how complex the broader economic system can be.
Disclaimer: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Please consult with a qualified financial advisor before making any financial decisions.
