The short answer is “No.” Last week, the Federal Reserve (“Fed”) lowered the Federal Funds Rate by 0.5%. This means that interest rates for commercial loans, auto loans, home equity lines of credit, and credit cards will likely decline. It does not guarantee that mortgage rates will decline, especially right away.
Ultimately, mortgage interest rates move independently of Fed decisions, but Fed decisions impact the international financial markets, and market forces do move mortgage rates. Here are two recent examples of how mortgage rates have moved independently of Fed actions.
From January 1, 2022, until March 15, 2022, mortgage rates increased by about 1.5%. On March 16, 2022, the Fed announced its first post-pandemic rate increase. So, mortgages rates moved 1.5% with no Fed action. From May 1, 2024, until September 17, 2024, mortgage rates decreased 1.5%. On September 18, 2024, the Fed announced a 0.5% rate cut. Once again, mortgage rates moved a full 1.5% before the Fed took any action.
What happened to mortgage rates after the September 18 Fed announcement? Mortgage rates got slightly (not much!) higher after the Fed announcement. What drives mortgage rates?
Most mortgages are pooled into financial instruments called mortgage-backed securities (MBS). Investors (insurance companies, mutual funds, etc.) purchase them to obtain a stream of future interest payments. The most comparable investment, in terms of risk and performance is the 10-Year US Treasury Bill. Large institutional investors must constantly decide how to invest their funds based on risk and return. They can purchase many types of securities other than MBS. MBS rates must be competitive vs other investment vehicles – including the stock market – to attract investor funds.
To understand why mortgage rates increased after the recent Fed announcement, look at the stock market. The Dow Jones Industrial Average rose by 520 points from the market close on September 18 to the close on the 19th. Investors were enthusiastic about the Fed’s announcement, the stock market reacted positively to the news and stock prices rose. To continue attracting investors, interest rates on MBS, which drive mortgage interest rates, rose to compete with the stock market. It’s all about competing investment vehicles and attracting Wall Street investment dollars. In the few days since the 19th, the stock market has remained flat and mortgage rates have basically stayed flat too.
Will mortgage rates decline further going forward? I’ve seen some “experts” say mortgages rates will settle into the mid/upper 5s in 2025, and others saying rates could fall below 5% in 2025. That’s a pretty big range and doesn’t take into consideration how unexpected events (international news, elections, wars) will impact financial markets and mortgage rates. There are many variables.
Here’s what I will predict – if you bought a house in the second half of 2023 or early 2024, you can probably refinance to a lower interest rate and potentially save hundreds of dollars each month. Check out the two prior Mortgage Blog posts for more information. Give me a call and I’ll do the analysis for you.
Want to buy a house in Georgia? I say do it now, before rates fall further and everyone else who wants a home begins making offers. Get your home now before competition gets intense again. You can always refinance later if rates continue to drop. Call me and we can discuss the best mortgage for you and tools to help you win in competitive situations.
