Mortgage rate averages sink on heels of Federal Reserve cut

Thirty-year, fixed-rate loan averaged 6.26% as of Thursday, according to Freddie Mac

Mortgage rates reached another almost yearlong low, a shift that comes just a day after the Federal Reserve cut interest rates for the first time since December.

As of Thursday, the 30-year, fixed-rate mortgage averaged 6.26%, according to mortgage giant Freddie Mac. That's down from a week earlier, and it's the lowest average since Oct. 3, when the loan averaged 6.12%.

The 15-year, fixed-rate mortgage also eased, averaging 5.41%.

The highly anticipated update comes a day after the central bank lowered its overnight interest rates by a quarter of a basis point. Even though the Fed doesn't set mortgage rates, borrowers have eagerly awaited a cut in hopes of lower loan rates and greater housing affordability.

If there’s an apt example of how the Fed and mortgage rates interact, though, it’s what unfolded Wednesday afternoon after Fed Chair Jerome Powell gave his press conference: Daily mortgage rates increased. As of the end of the day Wednesday, the 30-year, fixed-rate mortgage had risen to 6.22% and the 15-year, fixed-rate mortgage was up to 5.75%.

The Fed decision was reached a day after the 30-year, fixed-rate mortgage hit a three-year daily low, and it’s likely the result of the language Powell used in his speech.

“The official announcement of a rate cut is typically the least important aspect. In fact, it is usually entirely unimportant in terms of its impact on mortgage rates,” Matthew Graham, chief operating officer of Mortgage News Daily, explained in a blog post following the increase.

Remember, the mortgage market is more closely tied to the bond market than it is to Fed decisions. The bond market, however, reacts to the Fed and its forecasts, creating a ripple effect for mortgages.

“Powell framed today's cut as a ‘risk management’ cut and emphasized that the forecasts … do not represent a plan for future cuts,” Graham added. “Rather, the Fed will continue to take things on a meeting-by-meeting basis and make decisions based on the new data that becomes available over that time.”

In other words, Powell sent a message to markets that the Fed is still proceeding cautiously, and they should, too.

Will mortgage rates stay low?

As for what comes next for the mortgage market, there’s a degree of optimism among many experts and economists.

“If mortgage rates hold at these levels, origination activity will be boosted, both for homeowners who purchased in the last three years and can realize considerable savings at these rates and for potential homebuyers, who now have one more reason to look for a home, in addition to increasing housing supply in many markets,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, said in a statement Wednesday.

In fact, as mortgage rates moved down in anticipation of the Fed’s meeting this week, borrower activity has skyrocketed. Applications for mortgages rose nearly 30% in the week ended Sept. 12, according to data the association released Wednesday.

Much of that increase was driven by a 60% week-over-week surge in refinance demand. Compared to the same week a year earlier, refinance applications were up 70%.

It’s important to remember, though, that a similar narrative unfolded this time last year. Mortgage rates fell ahead of the Federal Reserve’s September meeting and subsequent interest rate cut. Economists, lenders and borrowers alike thought they had finally seen signs of progress. And then? Mortgage rates resumed their uphill climb.

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What could be different this year? For one, there’s no upcoming election in the U.S. Also, the broader economic picture is quite different from a year ago, which could prompt the central bank to modify its approach to interest rates. Forecasts from economists at mortgage giant Fannie Mae and Bank of America have rates ending the year between roughly 6% and 6.5%. Put another way: It’s hard to say, according to Melissa Cohn, regional vice president at William Raveis Mortgage.“Now we go back to data watching for the direction of mortgage rates for the rest of the month,” she said in a statement Wednesday. "We’ll need to wait and see … Future rate cuts will be dependent on new data on jobs and inflation.”

Housing affordability is a local issue

For now, the Fed’s decision to cut rates yesterday and the current state of the mortgage market should improve conditions for borrowers across the spectrum, but geography will be the differentiator.

Take Los Angeles’ upper-tier market, for example. Though most luxury deals are cash, “affluent buyers still weigh the cost of capital,” according to Tessa Hilton, co-CEO of luxury brokerage Hilton Hilton.

“Rising rates often bring caution and price pressure; when rates ease, urgency and competition return,” she said in a statement Wednesday. “With the Fed’s recent quarter-point cut, we anticipate renewed buyer engagement and optimism, which are both key drivers of momentum at the very top of the market.”

Elsewhere, borrowers will have to consider more than just the interest rate environment, according to Ken Johnson, Walker Family Chair of Real Estate at the University of Mississippi.

“Competition for housing remains high in cities such as Buffalo and Chicago, among others, where inventory remains tight,” he explained in a Tuesday blog post. “In these areas, price declines have been minimal, and lower rates from the Fed, which should reasonably be expected to lead to lower mortgage rates over time, will very likely reignite home prices and serve to only exacerbate housing affordability issues.”

On the other hand, in oversupplied markets such as Austin, San Antonio, Phoenix and Las Vegas, “lowering mortgage rates should slow or stop home price declines,” Johnson said.

“This is a reminder for buyers, sellers, and developers to concentrate on local market analysis as opposed to national headlines,” he added. “Local conditions, as always, drive local prices.”