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What the Fed’s Latest Rate Cut Means for Mortgage Rates: A 2024 Snapshot
In September 2024, the Federal Reserve made a pivotal move by slashing its benchmark interest rate by 0.5%, marking its first significant rate cut in four years. While many anticipated this decision would dramatically reduce mortgage rates, the impact has been more moderate than expected. Here’s a closer look at how the Fed’s actions influence mortgage rates and what this means for homebuyers and the housing market.
The Relationship Between Fed Rate Cuts and Mortgage Rates
First, it’s essential to understand that while the Federal Reserve does influence mortgage rates, it doesn’t directly set them. The Fed controls the federal funds rate; the interest rate banks charge each other for overnight loans. When the Fed lowers this rate, it typically reduces consumer borrowing costs on credit cards, auto loans, and variable-rate mortgages, such as adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs). However, fixed-rate mortgage rates are more closely tied to long-term Treasury bond yields and are influenced by broader market conditions like inflation and economic growth.
Modest Declines in Mortgage Rates
In the weeks leading up to the Fed’s announcement, lenders had already adjusted their offerings, anticipating the rate cut. As a result, mortgage rates had already fallen slightly, dropping about 23 basis points before the meeting. Following the Fed’s decision, average mortgage rates hovered just below 6%, providing some relief for prospective homebuyers but not the drastic reduction some had hoped for.
This reduction comes as the housing market still grapples with tight inventory, which has elevated home prices. While lower mortgage rates can help reduce monthly payments for new buyers, the high cost of homes in many markets is still a significant hurdle.
Why Mortgage Rates Aren’t Dropping Faster
Although the Fed’s rate cut signals a shift in monetary policy to stimulate economic growth, other factors continue to hold mortgage rates at elevated levels. For one, inflation, though slowing, remains above the Fed’s long-term target of 2%. Additionally, the Fed’s aggressive moves to combat inflation in previous years had pushed rates to 23-year highs, and it will take time for the market to adjust fully.
Furthermore, fixed mortgage rates are more influenced by the yield on 10-year Treasury bonds, which haven’t seen a significant enough drop to drive rates back down to the ultra-low levels experienced during the pandemic. Economists predict that while mortgage rates may continue to fall gradually, a return to sub-4% rates is unlikely in the foreseeable future.
What This Means for Homebuyers
The Fed’s recent actions offer some hope for those waiting for mortgage rates to fall, but managing expectations is essential. The days of 3% mortgage rates are likely behind us, and while rates below 6% are a welcome improvement, the overall cost of purchasing a home remains high due to limited housing supply and rising prices. Buyers looking to lock in a fixed-rate mortgage may still find opportunities to secure a lower rate than earlier in 2024 but should be prepared for a competitive market.
On the other hand, those with adjustable-rate mortgages or considering HELOCs may benefit more directly from the Fed’s actions, as these rates are more closely tied to the federal funds rate and could see quicker declines.
Conclusion
The Fed’s decision to cut rates by 0.5% is a clear signal of a shift in economic priorities, with the central bank now focusing more on preventing a weakening job market than solely battling inflation. While this is good news for mortgage shoppers, the impact on mortgage rates will be gradual. Fixed-rate mortgages are declining but not dramatically, and the housing market remains tight with high prices. This means modest relief for homebuyers but likely no return to the record-low rates seen in previous years.
If you’re considering purchasing a home, it’s still an excellent time to explore your options and consult a mortgage lender to lock in a rate that fits your financial situation. Though the Fed has set the stage for lower borrowing costs, the total effect on the housing market will unfold over time.
