Despite Interest Rate Cuts, Mortgage Rates Are Rising

When the Federal Reserve lowers interest rates, as it did in September and again last week, mortgage rates naturally follow suit, right? Wrong.

After mortgage rates fell steadily from this spring through September, the rate on a 30-year mortgage has reversed course and climbed sharply over the past month to 6.79% nationally, from about 6.1% at the start of October, The New York Times reports.

The counterintuitive uptick has come as an unpleasant shock to many co-op and condo buyers, who had waited many months for Fed officials to begin lowering borrowing costs, hoping that this would bring relief to the mortgage market.

It did not. Why? For one thing, market-based rates like mortgages tend to move in anticipation of future Fed policy — not the policy at the moment when the cuts happen. And just how much the central bank will manage to lower rates next year is increasingly in doubt. The economy has been stronger than expected, which could argue for less aggressive Fed reductions on interest rates. Donald Trump’s election as president only further fuels uncertainty.

Trump has proposed a cocktail of tariff increases and tax cuts that could stoke inflation, economists and investors believe. That's because consumers — not producers — pay for tariffs, which means many imported goods will cost more. As a result, White House policy could prevent Fed officials from lowering borrowing costs by as much as they otherwise might. In fact, Wall Street investors began to bet on higher inflation and fewer rate cuts as Trump’s victory came into sight. And mortgage costs also move for reasons other than the Fed outlook: Expectations for higher deficits could also help to push them up, for instance.

In his Housing Notes newsletter, the appraiser Jonathan Miller lays out the math starkly: "Trump's economic policy centerpiece is largely based on inflationary tariffs. The strong employment and wage sector coupled with a pivot to future inflationary policy pushes mortgage rates higher."

So, given the result of the Nov. 5 election, co-op and condo buyers who are waiting for sharp drops in mortgage rates are likely in for a long wait. How long?

Greg McBride, chief financial analyst at Bankrate, says he's expecting that “the new normal over the next couple years will be mortgage rates in the 5% to 6% (range).” Daryl Fairweather, chief economist at Redfin, said she thinks that rates will drop to around 6% over the next 12 months.

Either would be far above the sub-3% rates of 2021 — or even the 3 to 4% rates that were common in the 2010s — and higher than what some economists were projecting just a few months ago.

You may recall that during the recent campaign Trump promised that, if elected, he would sharply reduce interest rates, including mortgage rates. He neglected to mention that the president has no direct control over Federal Reserve policy.