‘Recent volatility may persist as the market adjusts to each new piece of economic data,’ Realtor.com’s Hannah Jones says

Bad news for home buyers: Mortgage rates are surging again as the financial markets weigh incoming economic data showing strength in the U.S. economy, as well as the possible outcome of the upcoming presidential election, experts say.

The increase in rates has been sudden. The average 30-year fixed-rate mortgage has risen 72 basis points over the course of October alone.

The 30-year rate averaged 6.92% as of Oct. 23, according to a daily survey by Mortgage News Daily.

That translates to a $2,700 monthly mortgage payment if a buyer purchases a resale home at the median U.S. sale price of $404,500.

Mortgage rates only indirectly influenced by the Federal Reserve

The increase in mortgage rates may be confusing, given that the Federal Reserve made the first cut to its benchmark interest rate in four years last month, and is expected to cut interest rates again over the coming months.

But the explanation is simple: The 30-year mortgage rate’s moves are not directly tied to the Fed’s rate cuts. Rather, they move in anticipation of what the Fed will do next, and in the near to medium term.

Case in point: The 30-year rate had initially fallen close to 6% before the Federal Reserve cut its benchmark interest rate by 50 basis points. The drop triggered a surge in refinancing activity as homeowners scrambled to trim their monthly payments.

Now that the financial markets are feeling pessimistic about the Fed cutting rates again at its early November meeting, the 30-year rate has retraced its steps and gone back up to the 7% range.

The 30-year mortgage rate tends to follow the direction of the 10-year Treasury yield BX:TMUBMUSD10Y. And the 10-year has been trending upwards, bringing mortgage rates up in tandem.

Why are mortgage rates rising?

Why is the market feeling pessimistic about the odds of a Fed rate cut?

Rates are moving up due to jitters over the upcoming presidential election and the nature of U.S. economic data, Samir Dedhia, chief executive of New Jersey-based One Real Mortgage, told MarketWatch.

“Traders are watching closely, with fears that a strong labor-market report next week or the election outcome could push rates even higher,” he said. The October employment report is expected to be released at 8:30 a.m. Eastern time on Nov. 1.

Rates have climbed higher in the last few weeks as job numbers have been stronger than expected, Hannah Jones, senior research economic analyst at Realtor.com, told MarketWatch. And that data have “dashed some of the market’s hope of easy progress towards lower inflation,” she added.

(Realtor.com is operated by News Corp subsidiary Move Inc. MarketWatch is a unit of Dow Jones, which is also a subsidiary of News Corp.)

When will mortgage rates fall?

The better the U.S. economy performs, the less likely it is that the Fed will cut interest rates. The risk is that if the Fed cuts too quickly, it could reignite inflation, as one Fed policymaker said recently.

So given this current period of uncertainty, “it wouldn’t be surprising to see mortgage rates continuing to increase between now and Election Day,” Dedhia said.

Still, today’s rates are a relative improvement for prospective home buyers compared with a year ago, when the average 30-year fixed-rate mortgage soared to around 8% – though they’re still up dramatically from the pandemic era’s buyer-friendly 2% rates.

But patience could likely pay off for those who wait. “Mortgage rates are still expected to generally ease in the coming months and into next year,” Jones said. She added, however, that “recent volatility may persist as the market adjusts to each new piece of economic data.”

In its latest forecast, Fannie Mae (FNMA), which backs one in four U.S. residential mortgages, said it expects the 30-year mortgage rate to fall below 6% by the start of 2025, and to drop to 5.6% by the end of next year.

-Aarthi Swaminathan

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

Provided by By Aarthi Swaminathan Dow JonesOct 24, 2024