How Federal Reserve Rate Cuts Affect Mortgage Rates

The Federal Reserve recently cut the federal funds rate for the first time in four years, lowering it by 0.5%. While the Fed doesn’t directly control mortgage rates, its actions often influence them and many people are asking, “Why Didn’t Mortgage Rates Drop More?” This is a tricky question, but there are a few major factors at play:

 

• Preemptive Rate Drops: Mortgage rates had already dropped significantly in recent months. “We’re now consistently back to the mid-5% range on purchases with high credit scores, which is about a 1% decrease from just a few months ago,” explains Bolst’s preferred lender Mark Daker of Ameris Bank. This preemptive drop likely absorbed much of the potential impact from the Fed’s cut.
• Market Anticipation: Traders in the mortgage market had already anticipated the Fed’s move. “The traders that drive the market are smart and in tune with what they anticipate the Fed doing, so it appears they may have priced the 0.5% drop into their trading,” Daker adds.
• Uncertainty About Future Cuts: “The Fed’s commentary left a lot of ambiguity about future rate cuts, likely leaving the market scared to further purchase lower trading coupons,” explains Daker.

Another key factor is housing inventory. A balanced market typically has six months' worth of supply, but recent numbers have only shown three months. If mortgage rates were to drop quickly, it could create a rush of buyers, reducing inventory and pushing the market back into an aggressive seller’s market. Gradually lowering rates helps maintain stability in the housing market and avoid sudden price hikes.

 

The bottom line - The recent Fed rate cut didn’t lead to a huge drop in mortgage rates, but the current rate environment is more favorable than it has been and there are good opportunities out there for buyers. The right time to buy is when it is right for YOU!

 

(Written October 1, 2024)