What happened?
At the Federal Open Market Committee (FOMC) meeting on Nov. 7, the Federal Reserve cut their target rate by 25 basis points, an uncontroversial move that was widely expected by the market.
Citing progress on inflation’s path toward normalization, Powell said the Fed is able to pursue additional rate cuts, though there is greater uncertainty longer term.
The Fed is still data-dependent. While investors expect another rate cut in December, that could be delayed if surprisingly hot economic signals pop up over the next few weeks.
Where will rates go from here?
It’s always difficult to predict where rates are heading, and that’s even more true now. Mortgage rates have been extremely volatile in the months leading up to this meeting, and there’s every reason to expect more volatility to come.
Since the September meeting, when the Fed first cut interest rates, longer term yields, like US Treasuries and mortgage rates, have risen significantly. The significant spike in yields is a reflection of both a month of hotter-than-expected data, and the anticipation of potential economic policies to be put forth by a new administration.
The Fed has chosen to look through the noise for now, citing that there’s “nothing to model” until policies are actually drafted. While the Fed feels like the downside risk to growth has diminished, it’s still choosing to move policy away from restrictive and closer to neutral.
However, as Fed policy relaxes, and as the Fed gets more clarity on economic data and economic policy, their future rate path may deviate from past economic projections and current market pricing. As markets reprice, that’s likely to mean volatility for mortgage rates.
What does that mean for the housing market?
The recent spike in mortgage rates is a headwind for housing activity. If the US economy continues to show resilience, there is a floor on how low mortgage rates could fall, and affordability will remain a challenge.
While September’s lower mortgage rates brought buyers and sellers back into the market, October data highlighted the effects of higher rates. Zillow’s findings show that home buyers gave back some of the affordability gains achieved in September, when mortgage rates were lower. Buying the typical US home with a 20% down payment would mean an increase of $175 in the monthly mortgage payment for buyers who waited.
But the overall impact this recent rise in mortgage rates has had on the housing market has been blunted by coinciding with the beginning of the holiday season, when activity typically slows down anyway.
If additional clarity allows mortgage rates to trend down in the coming months, the affordability tailwind could lead to a more active home shopping environment this spring, when buyers and sellers tend to return from their winter hibernation. Of course, the future of mortgage rates is uncertain, and it is far from a guarantee that we will see lower rates in the spring.
For households prepared to make a purchase now, they may hold negotiating leverage. A Zillow survey revealed that 45% of successful recent buyers secured a mortgage rate below 5%, despite average rates sitting well above that throughout 2024. Many of these home buyers achieved this through interest rate buydowns, financed either by themselves or provided as concessions from sellers or homebuilders. Even in challenging conditions, viable solutions are still accessible.
