By John Meyer, consultant in business and financial affairs – Eurasia Business News, October 7, 2024. Article n°1253.

Despite the recent Federal Reserve interest rate cut, mortgage rates have not seen a significant decline. Here are the key reasons behind this phenomenon:

Anticipation of Rate Cuts Already Priced In

The mortgage market has already incorporated the Fed’s widely anticipated cut into the rates borrowers are paying for home loans. Experts noted that the market had reacted to expectations of lower rates prior to the actual announcement, with the average 30-year fixed mortgage rate dropping over a percentage point since May 2024. This means that much of the potential benefit from the Fed’s actions may already be reflected in current mortgage rates.

Influence of Treasury Yields

Mortgage rates are closely tied to the yield on the 10-year Treasury bond rather than directly to the federal funds rate. Following the Fed’s cut, yields on these bonds actually ticked upward, which can counteract potential decreases in mortgage rates. As such, even with a lower federal funds rate, if Treasury yields rise, mortgage rates may not fall accordingly.

Market Conditions and Inventory Shortages

The housing market remains sluggish, characterized by high home prices and low inventory. Even with lower borrowing costs, demand may not significantly increase if available homes remain scarce. The so-called “lock-in effect,” where current homeowners hesitate to sell due to higher prevailing mortgage rates, continues to limit inventory. This scarcity can keep prices elevated, offsetting any benefits that might come from lower mortgage rates.

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Gradual Market Recovery Expected

Experts predict that while immediate changes in mortgage rates may be minimal, a gradual decline is expected as economic conditions stabilize and more rate cuts are anticipated through 2025. The Federal Open Market Committee projects further reductions in interest rates, which could eventually lead to lower mortgage costs as these changes permeate through the economy.

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In summary, while the Fed’s recent cut is a positive signal for the economy and could eventually lead to lower mortgage rates, several factors—including prior market adjustments, rising Treasury yields, ongoing housing supply issues, and consumer behavior—are currently preventing a significant drop in mortgage costs. As these dynamics evolve, there may be more favorable conditions for homebuyers in the future.

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© Copyright 2024 – Eurasia Business News. Article no. 1253.