Lower mortgage rates are coming

Let’s take a step back for a moment to fully understand the situation at hand. Inflation reached a four-decade high two summers ago; the Fed was already raising interest rates and only got more aggressive. Mortgage rates, which were hovering near all-time lows, soared, and the housing market froze: people stopped buying and selling homes. After hearing that, you might think an interest rate cut would translate to a drop in mortgage rates, but the federal funds rate isn’t directly connected to mortgage rates. It’s the 10-year treasury mortgage rates pair with, and the spread between the two is higher than usual. 

But on the back of months of positive economic data, expectations began to build that this month the Fed would finally deliver a rate cut. That talk sent mortgage rates to their lowest in 19 months, because the bond market was already pricing in a cut. “Mortgage rates are far more related to the expectation of what the Fed will do rather than what the Fed actually does,” Thomas Ryan, an economist at Capital Economics, told Fortune. “So mortgage rates already reflect that cut in interest rates.”

The average 30-year fixed weekly mortgage rate was sitting at 6.2%, as of last Thursday. In early May, it was 7.22%; and in October last year, it was 7.79%. So we’ve come quite a ways. Yet buying and selling hasn’t picked up (although there has been somewhat of a bounce in refinancing.) Either way, it doesn’t seem as though that’ll change much. People are holding out for lower mortgage rates, even if they aren’t going to get them right away. But being hindered by the fear of missing out on lower rates might not be the best mindset. “The benefit is already out there and available in the form of lower mortgage rates than just a few months ago,” Mark Fleming, First American’s chief economist, told Fortune. 

Still, what the Fed does versus expectations actually does matter in terms of the 10-year treasury. When there’s uncertainty, it drives the spread higher, Ryan explained. And spreads have widened significantly in recent years. But because we now know the Fed has entered its slasher era, there’s less uncertainty, and we’ll probably see the spread shrink. That’ll of course put “downward pressure on mortgage rates,” Ryan said. It’s unclear when that’ll occur or by how much they’ll fall because a lot of the existing drop has already happened. So maybe we take a longer term look. 

“I think actually it’s less about this Wednesday, as much as we turn the corner into a monetary loosening cycle, rather than monetary tightening,” Fleming said. “In other words, it’s the fact that the Fed has finally started cutting rates…whatever they do on Wednesday, they will not be done. They will continue to cut rates through next year…it’s less about whether rates will drop immediately or not based on Wednesday. It’s a clear signal that lower rates are coming in the months to come.” 

Still, let’s not forget that lower rates or not, home prices are still high, and that’ll continue to be a problem—something Fed Chair Jerome Powell has hinted at himself. Moody’s economist, Nick Villa, recently said it well, too: “​​While lower mortgage rates are one possibility that could unlock more supply, at the end of the day, the country has a structural housing deficit and needs to continue building more homes.”