Why mortgage rates are climbing
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Since the Fed cut rates on Sept. 18, mortgage rates have actually been climbing.
Why it matters: The increase has depressed the beleaguered housing market, as would-be buyers who'd been gunning for lower rates are backing away and waiting it out.
- Home sales are on track for their worst year since 1995.
By the numbers: The average rate on the 30-year mortgage rose to 6.72% this week, the highest since August 1, per Freddie Mac's weekly number.
- Mortgage News Daily, which tracks the situation closer to real time, reported Thursday the average was 7.09%.
- That's the highest since July — and it crosses a psychological rubicon that can be a turnoff — especially for buyers who'd believed a rate cut would lower mortgage rates.
- When the Fed cut in September, average mortgage rates were closer to 6%.
What they're saying: "There was a possibility that mortgage rates would rise after the September rate cut, but we didn't expect them to rise this much," Chen Zhao, Redfin's economic research lead, said in a release on Thursday.
How it works: The relationship between the interest rate that the Fed sets and the interest rate on mortgages is not straightforward.
- Essentially, the Fed controls short-term rates. Longer-term rates, for 10-year Treasury bonds are set in global bond markets, based on inflation expectations and what investors believe the Fed is going to do further into the future, as Axios' Neil Irwin laid out last month.
- 30-year mortgage rates move in tandem with those longer-term bond rates.
Catch up fast: In August, investors believed the Fed was going to cut rates a few times to stimulate the economy.
- At the time, inflation was falling and job growth appeared to be slowing down. So the yield on the 10-year fell and mortgage rates fell, too.
- Then we got an October surprise: A stronger-than-expected jobs report.
That changed everything. No longer were investors expecting many more rate cuts; the future became murkier.
- That uncertainty sent 10-year yields back up — and mortgage rates, too.
The intrigue: Speaking of uncertainty, the election plays a role here as well.
- At the moment, the consensus view of investors is that Donald Trump will win next week, as Tom Graff, a long-time mortgage bond trader, explained on a recent episode of the "Odd Lots" podcast.
- The belief is a Trump presidency — and the tax cuts and higher tariffs it could bring — would be broadly inflationary and volatile. That could mean no rate cuts, fewer rate cuts or less steep rate cuts. Who can say?!
- The election uncertainty has also slowed down homebuyers, who are waiting to see what happens before making a big life decision, Redfin agents aid.
What to watch: The jobs report for October is out Friday morning and might bring more clarity to the economic picture.
