Mortgage rates tend to fall within 12 weeks of an initial Fed rate cut Loaner

Lately, there has been a lot of speculation surrounding the direction of mortgage rates.

I, too, have been very involved in this trying to figure out what the next step would be in terms of pricing.

Despite the recent increase in the 30-year fixed rate from around 6% to 7%, I remain optimistic that a downward trend will continue.

In fact, I haven’t changed my mind since they started falling about a year ago, when they seemed to be plateauing at 8%.

Many other economists and experts have done an about-face since the Fed first cut rates in September, but that could turn out to be a mistake.

Mortgage rates trend lower ahead of first Fed rate cut

The Fed’s first rate cut this cycle took place on September 18, with the Federal Reserve opting for a 50 basis point cut in its federal funds rate (FFR).

This marked the “pivot” after the Fed raised rates 11 times starting in early 2022 to combat inflation.

The reason they ultimately reversed course after raising rates so much was because they felt inflation was no longer a major concern and that keeping rates high longer could impact employment.

Their dual mandate it is price stability and maximum sustainable employment, from which the latter could suffer if monetary policy remains too restrictive.

Regardless, that led to their first rate cut and, much to everyone’s surprise, the 30-year fixed rate has climbed about a percentage point since then, as the chart from MND above.

Many people think that the Fed controls mortgage rates, so that when it “goes down,” home loan rates also go down.

This is a long-standing myth that has proven difficult to shake, but perhaps the recent movement in mortgage rates will finally put it to rest.

After all, the 30-year fixed rate was around 6.125% on September 18, and quickly climbed to 7.125% in early November.

So maybe people will stop believing that the Fed controls mortgage rates.

However, mortgage rates tend to move in the same general direction as the federal funds rate.

For what? Because even though the FFR is a short-term rate and the 30-year fixed rate is obviously a long-term rate, the Fed’s rate cut generally signals future economic weakness.

And weakness means a flight to safety, that is, investing in bonds, which increases their price and decreases their yield (interest rate).

Mortgage Rates Reacted Quite Normally to the Fed’s Rate Pivot

Check out this table of Freddie Macwhich details the evolution of mortgage rates 12 weeks before and 12 weeks after the first Fed rate cut.

Although it appears that 2024 may not be a special year, considering that rates fell about 80 basis points before the cut, a rebound was not entirely unexpected.

Because a Fed rate cut is largely tied to it, rates often bounce back a bit once the news is announced. It’s a classic event: buy the rumor, sell the news.

Also consider that a strong jobs report was released shortly after the Fed’s policy decision, which had a big impact on rates.

So it also depends on what’s happening around the same time. What if the jobs report was weaker than expected? Where would we be today?

Regardless, there have been instances in the past where mortgage rates have followed a similar trajectory, including in 2020 and 1998.

Over many years of pivoting, mortgage rates rose for a short period before starting to fall again.

But more importantly, mortgage rates have still been falling, leading to the pivot. There has always been a downward movement before the pivot.

Simply put, mortgage rates favor anticipation of a Fed pivot, which explains why, again this year, the 30-year fixed rate rose from 7.5% in May to 6.125% in September.

Will mortgage rates get back on track as they have in the past?

Using the chart above, we can see that the 30-year fixed rate remains significantly higher than it was before the Fed’s rate cut.

But over the past two weeks (shown in the first chart), rates have eased a bit. The 30 year peaked around 7.125% and has since fallen back to around 6.875%.

So it gained about 25 basis points from its move higher and could get more.

It will be about 12 weeks since the Fed pivot in two weeks, so we are running out of time to get everything back.

However, history shows that mortgage rates tend to return to at least their initial Fed rate cut levels in just three months.

And often go even lower beyond that, if any of the other pivots seen in the past are any indication.

That’s not to say that history always repeats itself, but it would be surprising if rates don’t return to the low 6% range soon, simply matching the levels seen in mid-September.

It also wouldn’t be a shock if they moved even lower over time, perhaps into the high 5% range and beyond.

Again, if you look at the chart, they often continue to decline. But much will depend on what economic data is released, including Friday’s always-important jobs report.

What makes things murkier is the new administration and its plans, which have sent rates on a roller coaster ride, and may explain why they have risen so much more recently.

Continue reading: What will happen to mortgage rates in Trump’s second term?