Why Fed Rate Cuts Aren’t Making Mortgages Cheaper: A Real Estate Perspective

When the Federal Reserve announces a rate cut, many people assume mortgage rates will drop, making homeownership more affordable. But lately, that hasn’t been the case. If you’ve been wondering why, you’re not alone. Let’s break it down.

The Fed’s Role: Short-Term vs. Long-Term Rates

The Federal Reserve controls the federal funds rate, which is the interest rate banks charge each other for overnight loans. This influences short-term rates, such as those for credit cards and auto loans.

Mortgage rates, however, don’t follow the Fed’s lead directly. Instead, they’re more closely tied to long-term bond yields, particularly the 10-year Treasury yield. This means the factors driving mortgage rates are often very different from those influencing the Fed’s decisions.

Why Mortgage Rates Aren’t Dropping

Even though the Fed has been cutting rates, several forces are working against a decline in mortgage rates:

1. Rising Inflation Expectations
   Inflation plays a huge role in the bond market. When inflation is expected to rise, investors demand higher yields to compensate for the reduced purchasing power of their returns. This pushes up bond yields, which are directly linked to mortgage rates.

2. Global Economic Conditions
   Global factors, like geopolitical tensions or shifts in foreign economies, can impact U.S. bond markets. For instance, when global investors see the U.S. as a safe haven, they buy more bonds, which can lower yields. However, if confidence in the global economy grows, they may look elsewhere for higher returns, pushing U.S. yields—and mortgage rates—up.

3. Market Sentiment and Risk
   Mortgage rates are also influenced by lenders’ perceptions of risk. In uncertain times, lenders may keep rates higher to protect their margins, even if the Fed is cutting rates.

The Disconnect in Action

Recent trends show that despite the Fed’s efforts to stimulate the economy with rate cuts, mortgage rates have remained stubbornly high. This is largely due to rising inflation fears and shifts in global investor behavior, which have put upward pressure on long-term bond yields.

What This Means for Homebuyers

For potential homebuyers, the takeaway is clear: don’t assume that a Fed rate cut will automatically lead to lower mortgage rates. Mortgage rates depend on a web of economic factors, and while they may eventually trend down, it’s not a direct or immediate response to the Fed’s actions.

For Real Estate Professionals

As real estate professionals, it’s essential to educate clients about these complexities. Helping buyers understand why rates behave the way they do can set realistic expectations and build trust.

The Bottom Line

The Federal Reserve’s rate cuts are a powerful economic tool, but they don’t directly control mortgage rates. Instead, a mix of inflation expectations, bond market dynamics, and global economic conditions are at play. By understanding this, we can better navigate today’s real estate market and guide our clients through it.

When the Fed acts, the market reacts—but not always in the way you’d expect.