Mortgage industry reacts to Fed's third rate cut

"Despite the cuts, mortgage rates have largely refused to budge"

Mortgage industry reacts to Fed's third rate cut

The Federal Reserve reduced interest rates by 0.25% at its December 18 meeting, the third rate cut of the year. While the move was anticipated by markets, the Fed’s accompanying hawkish tone and projections have left mortgage and real estate professionals questioning its impact on the housing market.

Despite the rate cut, mortgage rates are unlikely to see significant changes.

“This cut is already baked into the 10-year bond yields, and will not have any impact on mortgage rates,” said Melissa Cohn, regional vice president of William Raveis Mortgage.

Mortgage rates have remained near 7% for months, showing little movement despite multiple Fed rate cuts this year.

Cohn noted that the rate reduction would benefit home equity loans, which will decrease by 0.25% following the prime rate adjustment.

The Federal Open Market Committee (FOMC) has signaled a cautious approach for 2025, projecting only two rate cuts next year and a long-term federal funds rate of 3%. The Mortgage Bankers Association predicted the rate will drop to 3.75% this cycle.

“Expectations that the Fed will cut rates less than had been anticipated have been priced into the market in the form of higher 10-year Treasury and higher mortgage rates in recent weeks,” said MBA chief economist Mike Fratantoni. “MBA’s forecast for mortgage rates moved up after the election, anticipating this change and recognizing the market’s reaction to the likely path for fiscal policy and the deficit.”

 Isaac Stell, investment manager at Wealth Club, questioned the timing of the cut.

“With an economy that’s going gangbusters and an incoming president with a fiscally loose agenda, you wonder why the Fed felt it necessary to cut,” Stell said. “Is this to curry favor with the incoming administration, or is there a bump in the road the Fed can see that the rest of us are missing?”

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MBA forecasts that mortgage rates will average around 6.5% over the next few years, with “significant volatility around that average.”

Consumer price inflation, which increased in November, continues to challenge the Fed’s goal of a 2% target. The central bank’s hawkish stance reflects concerns over inflation’s resistance to a decline, despite earlier downward trends.

Lawrence Yun, chief economist at the National Association of Realtors (NAR), highlighted how inflation has influenced mortgage rates.

“Despite the cuts to the short-term interest rates by the Federal Reserve, mortgage rates have largely refused to budge,” Yun said. “One reason is that consumer price inflation has not been fully contained and slightly accelerated in the past two months.

“Lending money over the longer term needs to compensate for future returned money's loss of purchasing power. More Fed-rate cuts are likely in 2025 because consumer prices should calm down measurably.”

Yun noted that apartment completions in the multifamily sector, thanks to last year’s high housing starts, could help ease rent pressures. Over time, this additional supply may narrow the gap between mortgage rates and affordability.

“The added supply will help cool rents. Therefore, the gap with the mortgage rates will not remain wide, which means mortgage rates will modestly trend lower,” he said. “Given that mortgage rates have stayed above 6% for more than two years, consumers are getting used to the new normal, especially considering that the 50-year average is 7.7%. Jobs and inventory will drive home sales.”

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