MORTGAGE RATES: What's Happening And What It Means for Buyers and Sellers
Mortgage Rates Still Near 7%: Why It’s Happening and What It Means for Buyers and Sellers
In recent months, the Federal Reserve has cut rates by 75 basis points, leading many to believe that mortgage rates would ease as well. However, despite the Fed’s actions, mortgage rates have continued to climb, with the 30-year fixed rate now hovering around 7%, up from 6.1% in September. This increase has caught some homebuyers and sellers off guard, especially given the expectation that rate cuts would help revive the housing market.
Why Are Rates Going Up When the Fed Is Cutting Rates?
At first glance, it might seem counterintuitive that mortgage rates are rising even as the Fed reduces its key interest rates. The key reason lies in the broader dynamics of the bond market, particularly the 10-year Treasury yield, which has seen an increase of over 80 basis points since September. Mortgage rates typically track the yield on the 10-year Treasury, which serves as a benchmark for long-term borrowing costs.
So, while the Federal Reserve has been cutting its short-term policy rate, investors are demanding higher yields on longer-term bonds in response to stronger-than-expected economic growth and persistent inflationary pressures. This has pushed up the 10-year Treasury yield, which in turn has driven up mortgage rates.
Additionally, the Fed’s actions don’t directly control long-term interest rates like those on mortgages; instead, they influence short-term borrowing costs and the overall economic environment.
What Does This Mean for Buyers?
For buyers hoping for a return to the sub-6% mortgage rates seen in 2022, the current trend is likely to be disappointing. With mortgage rates nearing 7% and inflation still a concern, it’s unlikely that we’ll see rates fall below 6% in the near future.
This means buyers who have been waiting for rates to fall further may need to adjust their expectations. For some, waiting for a market correction in home prices may seem like the logical step. However, with home prices remaining resilient due to tight housing supply, any material drop in prices is unlikely in the short term. As a result, buyers may need to get more creative with their financing options to make homeownership more affordable:
Adjustable-Rate Mortgages (ARMs): These can offer lower initial rates than fixed-rate loans, though they come with the risk of higher payments if rates rise after an initial period.
Rate Buydowns: Some buyers may consider negotiating with sellers to buy down the interest rate, reducing monthly payments for the first few years of the mortgage.
What Does This Mean for Sellers?
Sellers are facing a more challenging market compared to previous years, with many homes not selling during their initial listing period. As mortgage rates climb, fewer buyers are able to afford the same price points, which can lead to longer days on market and price reductions.
To stand out in a competitive market, sellers may need to get creative in how they market their homes:
- Offering Rate Buydown Incentives: Sellers could offer to pay for the buyer’s rate buydown, making the mortgage more affordable in the short term and potentially attracting more buyers.
- Adjusting Listing Prices: Sellers need to be more attuned to local market conditions and how their home stacks up against similar properties on the market. In many areas, homes that are overpriced compared to homes similar in size and condition have seen price cuts in order to generate interest.
- Flexibility on Terms: Sellers may need to consider more flexible terms, such as helping with closing costs, to make their home more appealing to buyers who are already facing higher borrowing costs.
The housing market today is defined by a delicate balance of rising mortgage rates, economic uncertainty, and inflationary pressures. Buyers and sellers alike will need to adjust to the new realities of the market.
As we move into 2025, it seems unlikely that mortgage rates will dip below 6%, and a significant decline in home prices appears equally improbable. For now, both buyers and sellers will need to be flexible and prepared to navigate a challenging and evolving market.