Rising mortgage rates, skyrocketing home prices and inflation putting pressure on budgets have kept many Americans from buying a home or moving for years.
While mortgage rates have started to fall slightly in recent months, the housing market remains largely stagnant as buyers and sellers alike sit on the sidelines waiting for more substantial rate cuts.
So will the Federal Reserve’s larger-than-expected 50 basis point interest rate cut on Wednesday have any effect on mortgage rates?
Mortgage rates fell to their lowest level in more than 18 months last week, with the average for a 30-year fixed-rate loan falling to 6.20%. But about 80% of mortgage holders currently have rates below 5% according to a Zillow survey.
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A lack of housing inventory is keeping home prices high, while the home buying crisis is being exacerbated by the Federal Reserve’s aggressive campaign to raise the federal funds rate in an effort to curb inflation.
While the federal funds rate is not paid directly by consumers, it affects borrowing costs for mortgages, auto loans, and credit cards. Mortgage rates are tied to movements in the 10-year Treasury yield.
Derrick Barker, CEO and co-founder of Nectar, a company that helps professional real estate investors through flexible lending, told FOX Business that in the short term, a 25-50 basis point cut in the federal funds rate was already priced into mortgage rates prior to Wednesday’s decision, noting that mortgage rates are determined by the market and the market was already anticipating a cut.
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Despite the big cuts, mortgage rates are likely to remain around current levels for at least a while, he predicts.
“We expect further declines in mortgage rates will depend on economic data,” he said. “If the economy continues to weaken, the mortgage market will likely expect further rate cuts from the Fed and will reflect this in lower interest rates.”
On the other hand, if economic activity improves, interest rates should be expected to rise again, Barker said.
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“I’m inclined to take the Fed at its word that it expects interest rates to remain elevated for an extended period of time,” he said. “So barring any unexpected economic shifts, the current mortgage rate environment could continue for years to come.”