Housing Market Outlook: Mortgage Rates Will Stay Around 6%

Prior to the Federal Reserve’s rate cut, mortgage rates had fallen tantalizingly close to what some considered the “magic number” of 6 percent that would revive a stagnant housing market marked by low inventory and the lock-in effect.

However, since the central bank unveiled this much-anticipated rate cut last month, mortgage rates have actually risen along with long-term Treasury yields.

To be sure, Fed tapering does not mean that mortgage rates are falling sharply, as mortgage rates follow the path expected by policymakers rather than their actual movements.

But in recent weeks, Fed officials and economic data have dampened hopes for an aggressive monetary easing cycle.

First, when the Fed cut interest rates, it also released officials’ economic projections, which included a so-called dot chart of where they see rates headed. This leaned towards a slightly smaller easing than the market had anticipated.

Then, during his follow-up news conference, Fed Chairman Jerome Powell said the jumbo half-point cut was not necessarily indicative of the pace of future cuts, adding that policy would remain data-driven.

And a week after that, Powell warned that Fed officials are in no rush to cut rates further. Finally, Friday’s strong jobs report pointed to a still-robust economy that needs plenty of workers demanding higher wages.

Wall Street analysts cut their Fed rate cut forecasts and the 10-year yield rose 12 basis points to 3.971%. The data was such a shock that some preachers even said the Fed would have to stop cutting rates to avoid reaccelerating inflation.

Mortgage rates followed higher Treasury yields. According to Mortgage News Daily, the average 30-year fixed rate rose 27 basis points on Friday alone to 6.53%, which is also 42 basis points higher than September 17 , just before the Fed cut interest rates.

In a statement after the jobs report, Mortgage Bankers Association chief economist Michael Fratantoni warned that the data could slow the expected pace of Fed rate cuts because inflation may not continue to cool in a straight line.

“The MBA forecast is for long-term rates, including mortgage rates, to remain in a relatively narrow range over the next year,” he added. “This news will push mortgage rates to the top of this range, but we expect mortgage rates to remain close to 6% over the next 12 months.”

Even before the jobs report, other housing market forecasts were already not very optimistic about activity and mortgage rates.

Days after the Fed meeting, mortgage giant Freddie Mac released its monthly outlook, which predicted mortgage rates would fall further but remain above 6% through the end of the year.

While demand should pick up, sales won’t get much of a boost as affordability will only improve modestly while the lock-in effect will continue to weigh on inventory.

“Unless rates drop significantly — something on the order of a percentage point or more — we don’t expect existing home inventory to come onto the market in large numbers, limiting supply,” Freddie Mac said. “We expect home sales to remain subdued in 2024 and 2025.”