"Rate cuts were supposed to push mortgage rates lower. The opposite has happened," per BI

The Federal Reserve’s interest rate cut in mid-September was expected to bring relief to prospective homebuyers by lowering mortgage rates. However, the opposite has occurred.

Since Fed Chair Jerome Powell reduced interest rates by 50 basis points on September 18, the average 30-year fixed mortgage rate has actually risen. Data from Mortgage News Daily shows that rates have climbed by 47 basis points, increasing from 6.15% to 6.62%.

This unexpected rise in mortgage rates is aligned with a shift in investor expectations regarding future Fed rate cuts. The 10-year Treasury yield, which closely correlates with mortgage rates, has also increased since the Fed's move. Investors seem more optimistic about the economy, resulting in fewer expectations of further rate easing.

Meanwhile, lower mortgage rates in certain markets are actually pushing home prices higher. Redfin reports that home prices increased by 6.7% year-over-year in August 2023, surpassing the 4.2% nationwide growth. As mortgage rates dropped, more buyers entered the market, creating a surge in demand that outpaced the available supply, leading to price increases.

According to Redfin Senior Economist Sheharyar Bokhari, the limited housing supply — which remains 30% lower than pre-pandemic levels — combined with the increase in demand has driven prices higher. He predicts further price growth if mortgage rates continue to fall this fall, as more buyers reenter the market.

Economists have long warned about the housing market's sensitivity to shifts in demand. Zillow’s chief economist, Skylar Olsen, recently noted that lower mortgage rates could lead to buyers quickly depleting existing housing inventory, locking up the market once again. Olsen stressed the need for policies that promote building more affordable and accessible housing units to stabilize the market.

The surge in demand and price hikes have been particularly noticeable in certain cities. Redfin identified 9 metro areas where home prices have seen double-digit increases over the past year. Year-over-year, prices have risen in nearly all of the top 50 metro areas, with only San Antonio and Austin experiencing a decline.

The situation was further amplified by a strong jobs report, released last Friday, which showed a surprise drop in unemployment and significant nonfarm payroll gains. According to Sonu Varghese, global macro strategist at Carson Group, mortgage rates have risen since the September Fed meeting due to strong economic data, including robust payroll figures, which has reduced recession fears.

As a result, some analysts are now suggesting that the Fed should pause rate cuts for the remainder of the year. This would dash expectations of extended easing and could mean that significant declines in mortgage rates are unlikely in the near future.