Fed Cuts Rates, Mortgage Rates.. Rise..?
Yes, you read that right.
The Federal Reserve has cut interest rates twice in recent months, first to a range between 4.75% - 5% on September 18, and then on November 7, to a range between 4.5% - 4.75%.
In the time since, the interest rate on a conventional 30 year mortgage has moved from 6.1% to nearly 6.8%. All homeowners looking to refinance and all buyers looking to borrow have one question - what gives???
We were all waiting with baited breath for the Fed to cut rates so that our mortgage rates would go down, and when they did the deed, the opposite happened!
How is this possible?
10-Year Treasury
30-year mortgage rates are more tied to the 10-year US Treasury Bonds than they are to the Federal Funds Rate. The Fed rate is essentially a short-term interest rate. It sets the floor for short-term interest rates because it is the rate at which banks will borrow from one another if they don’t have enough reserves.
The rate on the 10-year, on the contrary, is the rate you’d earn if you gave the US government your money to hold for 10 years.
Like all assets, the yield, or interest rate, is inversely proportional to the risk, meaning that if the risk is high, the yield is low, and vice versa. I won’t get into all of the reasons why the 10-year is rising while the short-term rates are falling, but know that it can signal many things, among them an anticipation from investors that inflation will remain higher for longer.
Implications for Massachusetts Real Estate
The results of mortgage rates being higher for longer in some sense keeps the status quo. Rates are already high by recent standards. It is likely to keep homeowners locked into their current mortgages, and to keep prospective buyers budgeting for higher monthly payments.
In Massachusetts, inventory remains constrained. October saw an inventory of 6,625 housing units for sale in the greater Boston statistical area - an increase of 24% from October 2023.
As usual though, this is still far below peak pandemic and pre-pandemic levels, a trend unlikely to change until the interest rate picture changes the figure below.
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