Interest rates are going down. But mortgage rates are… going up?

Rachel Siegel and Andrew Ackerman
| Washingtonpost

Interest rates are falling, but aspiring homeowners waiting for lower mortgage rates are not feeling relieved.

For years, wannabe buyers have waited for the Federal Reserve to cut interest rates after the central bank pushed them to their highest levels in decades. People who bought homes at high interest rates would also like to see financing costs drop so they can refinance and get lower payments.

Still, the Fed’s decision to cut rates has not lowered mortgage costs. Instead, the 30-year fixed-rate mortgage has risen over the past five weeks, reaching 6.72 percent at the end of October, according to mortgage finance company Freddie Mac. That is higher than when interest rates were just above 6 percent around the last Fed meeting in September.

“We’re waiting for the shoe to drop, but it won’t,” said Mike Kemp, who bought his roughly $700,000 home last November and would like to refinance his 7.25 percent mortgage.

Kemp isn’t alone: The housing market continues to confound economists and policymakers, who expected high interest rates to slow buyer demand and cool the entire economy. Instead, the economy is improving: inflation is still declining. Employers are still hiring (apart from a sharp slowdown last month due to strikes and hurricanes). GDP also continues to grow, giving the winner of this week’s presidential election a booming economy, where housing affordability issues have taken center stage.

This week, the Fed is expected to give the economy some momentum with a quarter-point rate cut. That would be a less aggressive move than the half-point cut since officials last met, when they feared the labor market would slow too much. If all goes as Fed watchers predict when policymakers conclude their two-day meeting on Thursday, the central bank’s benchmark interest rate would be between 4.5% and 4.75%.

In a speech last month, Fed Governor Christopher Waller said a recent set of strong data suggested “the economy may not be slowing as much as desired” and that as more data comes in, the central bank may cut rates more slowly than officials recently thought. month.

The Fed’s own forecasts still show a gradual decline in rates through the remainder of 2024 and 2025. But in the near term, experts don’t expect mortgage rates to fall much. Economists also note that the mortgage market is not just dependent on the interest rates the Fed sets; it also moves with the 10-year treasury. That percentage increases when investors predict future momentum.

“The economy continues to grow faster than expected,” said Sam Khater, chief economist at Freddie Mac. “And the puzzling thing is: why are expectations not adapted to the economic reality on the ground?”

A wave of refinancing applications followed the Fed’s September meeting, but that too has slowed as mortgage rates remain high. Data released last week from the Mortgage Bankers Association showed the refinancing share of mortgage activity fell to about 43% of total applications, down from nearly 46% the week before.

At a news conference in September, Fed Chairman Jerome H. Powell noted that much of the housing market is “frozen” because people with low interest rates don’t want to sell their homes and accept higher interest rates. Powell said there just isn’t enough housing, but that “if we normalize rates, you’ll see the housing market normalize.”

“Bringing inflation down broadly, normalizing interest rates and normalizing the housing cycle is the best we can do,” Powell said.

But that hasn’t happened yet — meaning Kemp is still waiting for lower rates in Phoenix. The chief executive of an auto repair company bought a house last year on the assumption he could quickly refinance once the Fed started cutting spending, creating crucial financial headroom. Instead, he and his wife are “strangling themselves financially” to pay $5,400 on their house every month, on top of groceries and other bills.

Steve Walsh, president of Scout Mortgage in Scottsdale, Arizona, said some of his clients have decided not to buy in the current market because they can rent for less than a mortgage each month. In the past month alone, rising mortgage rates have translated to about $500 a month for a typical home, he said.

“For a lot of people,” Walsh said, “that’s a big leap.”