When the Federal Reserve announced a larger-than-expected rate cut of 50 basis points, many potential homebuyers eagerly anticipated a drop in mortgage rates. Instead, mortgage rates climbed, leaving many scratching their heads. What gives?

Why Mortgage Rates Don’t Always Follow the Fed

It’s a common misconception that mortgage rates are tied directly to the Federal Reserve’s rate cuts. In reality, the Fed’s actions primarily impact short-term interest rates, like those on credit cards and auto loans, rather than long-term rates like mortgages. Mortgage rates are more closely linked to the yield on 10-year Treasury bonds. These yields fluctuate based on investor sentiment, inflation expectations, and economic outlooks.

What Happened This Time?

Despite the Fed's rate cut, fears of long-term inflation and economic uncertainty led investors to demand higher returns. Consequently, bond prices fell, yields rose, and mortgage rates followed suit. Additionally, concerns about wage growth, rising home prices, and overall inflation mean that lenders may set higher mortgage rates to protect their margins and account for the risk of diminished returns over time.

The Lesson for Buyers and Sellers

The takeaway is clear: the real estate market operates in its own sphere, often independent of the Fed's moves. Rate projections for the coming year suggest that mortgage rates will hover around their current levels. So, what should you do?

Buyers: Now is an excellent time to explore your options! Increased inventory in many markets means less competition, and you might not need to pay the full asking price. Pro tip: ask for a rate buy-down contribution at closing from the Seller—it could significantly reduce your long-term costs.

Sellers: Offer a rate buy-down contribution upfront in your listing to attract those Buyers on the fence about affordability. This incentive can be a game-changer and might be just what you need to get your home sold in this market.

If you’re a Buyer or Seller looking to seize control of the market, let’s chat about how to achieve your goals.