In 2024, the Federal Reserve made headlines by reducing its interest rate target three times, prompting many Americans to anticipate a decline in mortgage rates. However, experts caution that significant drops may not materialize in the near future. “The best-case scenario is that we will see mortgage rates stabilize around six and a half to seven percent,” states Jordan Jackson, a global market strategist at J.P. Morgan Asset Management. With these projections, potential homeowners hoping for reprieves from high mortgage costs may be left disappointed.
While the Federal Reserve does wield influence over economic conditions, mortgage rates are more specifically linked to long-term borrowing rates associated with government debt, particularly the yield on the 10-year Treasury note. Recent trends have shown an observable increase in this yield, as investors start weighing the potential ramifications of a more expansionary fiscal policy that could emerge from Washington in 2025. This evolving landscape will affect mortgage rates, as they are also influenced by the behavior of the mortgage-backed securities market.
Economists from Fannie Mae lend further credence to this view, observing that the Fed’s management of its mortgage-backed securities portfolio plays a significant role in shaping today’s mortgage rate environment. During the pandemic, the Federal Reserve aggressively purchased substantial quantities of these assets as a means to calibrate the supply and demand metrics of the bond market through what is known as quantitative easing.
Quantitative easing has a dual impact. It can narrow the disparity between mortgage rates and Treasury yields, resulting in lower loan costs for homebuyers and refinancing opportunities for current homeowners. This tactic achieved remarkable success in 2021 when mortgage rates hit unprecedented lows. However, the aggressive stance of the Fed in this context has also drawn scrutiny. Matthew Graham, COO of Mortgage News Daily, critiques the strategy as “probably ill-advised at the time,” suggesting that the swift escalation of mortgage-backed securities purchases resulted in unforeseen consequences for the overall economy.
In 2022, the Federal Reserve initiated a pivot toward tightening its monetary policy, primarily by allowing its existing asset holdings to mature, a process known as quantitative tightening. This shift has exerted upward pressure on the spread between mortgage rates and Treasury yields. Experts, including George Calhoun from the Hanlon Financial Systems Center, believe this new phase is a key reason mortgage rates continue to rise, prompting frustration as the Fed grapples with reversing its earlier policies.
As the housing market continues to navigate these challenges, prospective homebuyers may find themselves facing a tough landscape characterized by elevated mortgage rates. The interconnectedness of Fed policy, governmental fiscal maneuvers, and the broader bond market means that any meaningful reduction in mortgage costs may not come soon enough for anxious homeowners. With economic uncertainties looming and rates likely to remain volatile, the outlook for potential homebuyers in 2024 may necessitate strategic planning and a close watch on market dynamics.