Mortgage rates rose immediately after the Fed cut interest rates. Here’s why.

Here’s a puzzle for market watchers: Hours after the Federal Reserve cut interest rates Wednesday for the first time in 2020, mortgage rates rose 4 basis points.

Why? And are mortgage rates on an upward trend from here on out?

Most Read on MarketWatch

MarketWatch spoke to economists who said the uptick is temporary, likely due to how markets assess the central bank’s next move.

“This is a temporary problem. There’s no reason why they shouldn’t continue their decline for a while,” Robert Frick, a corporate economist at Navy Federal Credit Union, told MarketWatch.

“I fully expect (the 30-year mortgage rate) to settle below 6 percent in the next month or two,” he said. “So my advice would be (for people to) try not to read too much, because the market is fickle.”

On Wednesday afternoon, after the Fed announced it was cutting its benchmark interest rate by 50 basis points, Mortgage News Daily, a website that posts daily rate updates, crashed — perhaps a sign of intense interest in where the ducks were straightening.

Mortgage News Daily did not immediately respond to a request for comment.

The site later reported that the 30-year rate rose 4 basis points, or 0.04 percent, to 6.15 percent on Sept. 18, the day the Fed announced its rate cut. The next day, it reported that the 30-year rate rose another 2 basis points to 6.17%.

That was in contrast to a report from Freddie Mac measuring weekly averages for 30-year fixed-rate mortgages. It showed mortgage rates fell to their lowest level in two years on September 19. The weekly report does not study lenders, but is based on actual mortgage applications to lenders across the country that are submitted to Freddie Mac.

So why did rates rise just hours after the Fed eased monetary policy? “It’s because of what the Fed has indicated it’s going to do in future meetings,” Daryl Fairweather, chief economist at Redfin RDFN, told MarketWatch.

“The market was hoping to cut more than 50 basis points (in) this year, but they have indicated that they will go at a pace of 25 basis points per meeting,” she continued. “Mortgages have been around for (several) decades … so what the Fed says about future tapering may matter more than what they do today.”

The story continues

Mortgage rates are not tied to the Fed’s interest rate moves. Rather, mortgage rates typically fall ahead of a Fed rate cut as investors try to anticipate where the central bank will go next. And by that measure, the 10-year Treasury yield BX:TUBMUSD10Y is a good indicator of how mortgage rates will move.

Bond yields were higher Thursday for a few reasons, Melissa Cohn, regional vice president of William Raveis Mortgage in Connecticut, told MarketWatch.

With several reports indicating the economy is doing better than expected — from jobless claims to the Philadelphia Fed’s factory gauge and the stock market rally — “people are ditching bonds and moving into stocks” , Cohn said. “Whether bond yields will continue to rise in the short term is all about the data.”

But mortgage rates “will stabilize and even fall further this year if inflation continues to fall to the Fed’s 2 percent target,” Cohn said. “Jobs data will also play an important role in rates for the rest of the year,” she added.

Most economists expect the average 30-year mortgage rate to fall below 6 percent next year. This may be a disappointment to potential homebuyers who were hoping that rates would drop to the lows seen at the start of the pandemic. “We’ll never see mortgage rates of 3 percent (again) probably in our lifetime,” Frick said, but “I’m sure we’ll get into five at some point.”

Housing finance giant Fannie Mae FNMA expects the 30-year rate to fall to 6 percent by the first quarter of next year and to 5.7 percent by the end of 2025, according to its September forecast.

So should potential buyers jump in now or wait? For a buyer, small rate changes shouldn’t be the biggest factor in their decision, Frick advised.

“The overriding factor is, can you find a house that you want to buy and can you afford that price? Because the difference in waiting for a quarter or even half point drop in the mortgage rate is relatively insignificant just to find a house you can afford,” he said.

And for homeowners hoping to lower their monthly payment by refinancing, should they act now? That’s a more complex question, Frick said.

“It depends on what rate they paid. … My rule of thumb, which is different than a lot of people’s rule of thumb, is you have to have a 2 percentage point difference to be absolutely clear that you should refinance,” Frick said.

In other words, if the 30-year rate is at 6.09% as of September 19, refinancing would make sense for someone with an 8.09% rate.

He added, “If you’re going to be in the home for a very long time and you can get a 1 percentage point difference, yes, it’s probably worth it” after factoring in closing costs, which typically range from 2 percent at 6% of the loan value. “But if you’re stuck at 7.7% and now you can refine to 5.7%, it’s a no-brainer.”

Most Read on MarketWatch