Why did mortgage rates just go up?
The Fed’s Sept. 17 rate cut was expected, but new unemployment numbers were not, causing volatility this week. Still, affordability could improve by year end.
Key points:
- After hitting 6.13% on Tuesday, Mortgage News Daily’s survey showed the 30-year fixed-rate moved up to 6.37% on Thursday.
- Rates are still hovering around the lowest levels of the year, however, leading to a surge in refinancing.
- It’s unclear if rates are low enough to attract buyers given ongoing affordability challenges, but some indicators point to home price declines in the coming months.
After weeks of steady declines, mortgage rates have changed course, at least for the moment.
The day after the Federal Reserve announced a 25-basis point cut to short-term interest rates, the 30-year fixed rate mortgage rose, according to Mortgage News Daily. The rate fell to 6.13% — the lowest level in a year — on Sept. 16, but on Sept. 18, it was up to 6.37%.
Why the sudden reversal? It's likely that investors had already priced in the Fed rate cut and moved on to other economic data, such as Thursday's report showing that the number of Americans filing for unemployment benefits fell sharply last week. That data, which seems to counter other indicators of a softening labor market, may have come as a surprise to analysts.
While the unemployment report is good news for workers, it could slow down future rate cuts, especially if inflation starts flaring up again. It's reminiscent of what happened a year ago when the Federal Reserve started cutting short-term interest rates but had to pause as inflation began rising.
Lower rates still provide opportunities for buyers, homeowners
Despite today's upward movement, mortgage rates are still near the lowest levels of the year. Freddie Mac, which uses a separate set of metrics for its weekly report, estimated the 30-year fixed-rate mortgage averaged 6.26%, while the 15-year fixed-rate dropped to 5.41%. That prompted a surge in refinance applications this week along with some growth in purchase applications.
The relatively small increase in buyer applications compared to refis suggests that affordability remains a barrier for would-be homeowners, said Lisa Sturtevant, chief economist at Bright MLS.
"The bottom line is that lower mortgage rates are a step in the right direction, but the current rates may not be sufficient to unlock the housing market logjam. To facilitate more transactions, we will need to see both lower rates and slower home price growth, or even price drops," Sturtevant said.
So far, that's not happening. Redfin reported that prices rose 2.2% year-over-year during the four weeks ending Sept. 14 — the biggest increase in five months — as new listings have tapered off.
An end-of-year price drop?
The rise in home prices could be short-lived, however. Mike Simonsen, chief economist at Compass, noted in his weekly YouTube report that "shadow inventory" may be building.
Some sellers, unhappy with current market conditions, might have pulled their listings or are waiting to act — meaning that supply is not visible — but if interest rates fall further and demand picks up, those sellers could decide to list. That, in turn, could lead to home prices dipping below last year's level by December.
"We don't yet know if [mortgage rates are] low enough to really drive homebuyer demand — especially since the reason rates are falling is because the employment market is weakening — but we'll learn more soon," Simonsen said.