Here’s why mortgage rates aren’t tracking down with the Fed’s rate

Potential homebuyers and those who have already purchased a home but financed at a high interest rate were hoping the Federal Reserve’s decision to cut its federal funds rate in September would help drag down interest rates on mortgage loans, a reasonable expectation based on historic dynamics.
But since the Fed slashed its benchmark intra-bank overnight lending rate by 0.5% in September, and with the monetary body widely expected to assess a cut of .25% at its policy meeting this week, U.S. mortgage rates have been headed the other direction, with the latest reading from Freddie Mac pegging the average rate on a 30-year fixed rate mortgage at 6.72%, the highest since early August.
Mortgage rates are impacted by changes the Fed makes to its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution’s total deposits — but don’t necessarily move up in tandem with rate increases. Sometimes, as has been the case in recent weeks, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which in turn is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasury bonds. While mortgage rates plunged in the midst of the pandemic and were hovering around 2% in late 2021, the rates tracked up alongside the Fed’s series of 11 hikes to its federal funds rate.
Following the Fed’s rate cut decision in September, the first in four years, yields on 10-year Treasury notes have headed up, an escalation running counter to typical expectations but one that economists say is driven by a slew of other indicators that reflect a robust U.S. economy.
The factors helping boost yield rates on long-term federal bonds include the ongoing downward trend in U.S. inflation rates, consumer spending (which drives two-thirds of the U.S. economy) that remains high, overall GDP growth and a jobs sector that has shown surprising resilience.
Last week, Sam Khater, Freddie Mac’s chief economist, predicted mortgage interest rates were at or near peak levels but noted ongoing volatility in the near term was a likely scenario.
“Increasing for the fifth consecutive week, mortgage rates reached their highest level since the beginning of August,” Khater said in an Oct. 31 press release. “With several potential inflection points happening over the next week, including the jobs report, the 2024 election and the Federal Reserve interest rate decision, we can expect mortgage rates to remain volatile. Although uncertainty will remain, it does appear mortgage rates are cresting, and we do not expect them to reach the highs that we saw earlier this year.”
In addition to investors’ collective optimism about the direction of the U.S. economy that’s helping buoy bond yields, the simple economics of the current housing market are contributing to a realm where affordability is in question, even if lending rates come down.
Even after five straight weeks of increases, the average U.S. mortgage rate is over 1% lower than this time last year, but the U.S. remains mired in a once-in-a-generation housing affordability crisis, per a report from CNN.
In the four years through August 2024, national home prices had risen 45%, according to the S&P CoreLogic Case-Shiller Home Price Index. And, according to the National Association of Realtors, the median sales price of a home in the US hit a record high this summer and now hovers just below that level.
According to data compiled by Redfin, the median price of a home in Utah came in at $549,600 in September, down from the state’s all-time high of $575,000 set in May 2022, but well over the current national median price of $427,496.