Long-term mortgage costs have, in fact, risen since the Federal Reserve started cutting interest rates in September. Falling interest rates often mean lower mortgage costs.
However, that’s not what’s happened since the summer. The yield curve has steepened. That has more than offset any benefit from lower short-term rates for mortgage costs. Short-term rates have come down as longer term rates have risen. Ultimately, where mortgage rates go from here will depend on how expectations for the monetary policy and inflation play out relative to market expectations. Fed projections imply that mortgage costs could decline over the medium term, but other factors will matter, too.
Recent Movements In Mortgage Rates
After hitting lows of approximately 3% in 2020-2021 the 30-year mortgage has risen significantly since 2022, peaking at almost 8% in October 2023. It now stands at 6.8%. That rate is higher then the September low of just above 6%.
Since the Fed started cutting interest rates, short- and long-term interest rates in the U.S. have diverged. Short-term interest rates are now 0.75% lower than in August 2024 after two Fed rate cuts in September and November. In contrast, the 30-year mortgage rate is now 0.7% higher. This steepening of the yield curve and divergence of short- and long-term interest rates is not unusual, but is often associated with recessions, according to research from the Richmond Fed.
The Slope Of The Yield Curve
The inverted yield curve from summer 2022 to summer 2024 is historically less common than a positively sloped curve. In fact, the yield curve could steepen further. The curve is effectively flat today but in recent decades, longer rates have peaked at 3% to 4% above short-term rates.
The good news, for those hoping for lower mortgage rates, is that a lot of that steepening could come from the Fed cutting interest rates further rather than mortgage rates moving higher. For example the CME FedWatch tool projects that the Fed may cut short-term interest rates to below 4% by December 2025, though there is a broad spread of potential outcomes in that implicit projection.
What To Expect From Mortgage Rates
The U.S. bond market is one of the most liquid and sophisticated financial markets in the whole. As such, it generally is effective at pricing in current expectations for macroeconomic events. Looser monetary policy from the Fed over the next 12 months is already priced in to some degree.
If the Fed sees unanticipated weakness in the U.S. economy and cuts rates more than expected, that could bring down mortgage costs. Conversely, if inflation were to resurge and the Fed raised rates, then mortgage costs could move higher. However, for now, there is some optimism that the U.S. will avoid both a recession and major further inflation.
As of their September projections, Fed policymakers did anticipate short-term interest rates moving down to approximately 3% over the long term. Should that forecast hold, even with a steeper yield curve, it could ultimately lead to lower mortgage rates, though it could take some time.
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