If you’re in the market for a new home, you may have expected mortgage rates to drop in 2024 following the Federal Reserve’s interest rate cuts. However, mortgage rates have remained stubbornly high, leaving many buyers wondering why.
While the Fed’s policy decisions influence borrowing costs, mortgage rates are impacted by several other key factors. Let’s break down why rates are still elevated and what it means for prospective homebuyers.
Understanding the Federal Funds Rate vs. Mortgage Rates
The Federal Reserve controls the federal funds rate, which determines how much banks pay to borrow from each other overnight. While this rate indirectly affects borrowing costs, it does not set mortgage rates.
In 2024, the Fed cut interest rates three times in an effort to support economic growth, but mortgage rates didn’t drop as much as expected. Why? Because mortgage rates depend on more than just the Fed’s decisions.
The Three Biggest Factors Keeping Mortgage Rates High
1. Mortgage-Backed Securities (MBS) and the Fed’s Balance Sheet
Mortgage-backed securities (MBS) are investment assets made up of bundled home loans. These securities impact mortgage rates because they influence how easily banks can lend money for home purchases.
For years, the Federal Reserve purchased MBS to inject liquidity into the economy. However, since early 2022, the Fed has been reducing its balance sheet, meaning it’s no longer buying new MBS. This means less money is available for mortgage lending, which contributes to higher rates.
2. The 10-Year Treasury Yield
One of the best indicators of mortgage rate movement is the 10-year Treasury yield. Historically, mortgage rates and Treasury yields move together about 85% of the time.
When investors demand higher returns on Treasury bonds, mortgage rates rise as well. Recently, Treasury yields have remained high due to economic uncertainty, keeping mortgage rates elevated.
3. Inflation and National Debt
Inflation plays a significant role in determining interest rates. Lenders set mortgage rates based on inflation expectations—if inflation is expected to remain high, mortgage rates will also stay high to protect lenders from losing value on long-term loans.
Currently, inflation remains above the Fed’s 2% target, keeping mortgage rates from falling significantly. Additionally, high government spending and national debt levels can put upward pressure on interest rates, making borrowing more expensive.
What’s Next for Mortgage Rates in 2025?
The Federal Reserve has signaled that it may cut rates two more times in 2025. However, that doesn’t mean mortgage rates will automatically drop. While lower rates could make borrowing more affordable, they could also increase demand for homes, driving prices higher.
Many buyers who have been waiting on the sidelines may jump into the market if rates drop, making competition for homes even tougher.
What Should Homebuyers Do?
If you’re considering buying a home, waiting for lower rates might not be the best move. A more competitive market could drive prices up, negating any potential savings from a slightly lower mortgage rate.
Instead, focus on what you can control:
✅Improve your credit score to secure the best possible rate
✅ Explore different loan options, including adjustable-rate mortgages (ARMs)
✅Work with a knowledgeable real estate professional to find the best opportunities
If you’re thinking about buying a home this year and want expert guidance on your next steps, let’s talk! Reach out to me today, and let’s discuss the best strategy for your situation.
📞Contact me at (704) 931-5522 or via email at [email protected].