Mortgages Rates Are Way Down. How Fed Rate Cuts Could Change the Picture.

The Federal Reserve’s anticipated interest-rate cut is old news for mortgage rates, which have retreated from 2024 highs in anticipation. But that doesn’t mean home buyers should ignore the central bank’s announcement.

Mortgage rates, at a recent 6.2%, have dropped a percentage point since late spring on expectations for a September rate cut, according to Freddie Mac data released last week. What happens next is likely to depend on what the central bank has to say about the outlook

“Mortgage rates, having priced in an aggressive cutting cycle into 2025, are unlikely to move much until we hear from the Fed,” brokerage Redfin wrote in a release last week.

Recent mortgage rates are already pricing in Federal Reserve rate cuts of 0.5-0.75 percentage point through November’s meeting, says Keith Gumbinger, vice president at HSH.com, a mortgage information website. That is because mortgage rates move with the long-term bond market, which is influenced by future economic expectations, not the short-term fed-funds rate.

But any clues about the outlook for future rate cuts could still affect mortgage financing costs, for better or worse. If investors read the Federal Reserve’s post-meeting statement as a green light for a series of rate cuts, mortgage rates could move to new 2024 lows. But prospective buyers could see financing costs rise if markets are disappointed by the size of Wednesday’s reduction or signs of a slower-than-expected path of rate cuts.

“Whether [mortgage] rates move up or down after the meeting strongly depends on what the Fed says about its future intentions,” says Gumbinger.

The same could be true for homebuilders’ stocks, which rallied to new highs in the run-up to September’s meeting. Lower mortgage rates have made buying homes more affordable since early July, Bank of America Securities analysts Rafe Jadrosich and Shaun Calnan wrote in a Tuesday note. But it was largely expectations for what could come next that have sent the shares higher.

Builders’ stocks have risen “as investors look through near-term weakness to a 2025 recovery fueled by lower mortgage rates and pent-up demand,“ the analysts noted. “Stock performance following the first cut is more mixed although usually positive for homebuilders.”

No matter the reaction to the Fed decision, it is likely that mortgage rates end 2024 modestly lower. But don’t expect a dramatic drop.