The big Fed decision yesterday was keeping rates unchanged. Everyone knew that was going to be the case and didn’t bat an eye.
However, things are always a bit more interesting because we get to hear from the Fed Chair after they release their FOMC statement.
Chair Powell actually touched on the housing market directly, despite the Fed not being explicitly concerned with housing. Or with mortgage rates for that matter either.
But the takeaway seemed to be that the Fed continues to be in no rush to get too accommodative, despite pleas from the President and FHFA Director.
And that any changes, i.e. cuts, need to foster a sustainable housing market with better equilibrium between buyers and sellers.
Restoring Price Stability in a Sustainable Way
First some quick background. The Fed raised rates (their own fed funds rate) back in 2022 as inflation began to spiral out of control.
The housing market was also extremely overheated, in Powell’s own words, after a couple pandemic years pushed prices up another 50% (from already high levels) in many cities nationwide.
While the Fed couldn’t go out and build more houses to alleviate the supply shortage, and thus stabilize prices, they could do their best to cool demand.
The best way to cool demand would be by raising rates. The Fed doesn’t control mortgage rates, but their monetary policy can indirectly affect the price of bonds, like the 10-year Treasury.
This can cause bond yields to rise or fall, and 30-year fixed mortgage rates tend to correlate really well with the 10-year bond yield.
When the 10-year bond yield goes up, as it did in 2022, mortgage rates did too. And by a lot.
The 10-year bond went from around 1.75% to 4.25% from January to October of 2022, while the 30-year fixed climbed from 3.50% to 7.25%.
At the same time, mortgage rate spreads blew out due to the volatility and uncertainty, and the lack of the Fed being a buyer of mortgage-backed securities (MBS).
But home prices continued to go up (and still are to this day), though the rate of appreciation has slowed tremendously.
And in some areas, prices are actually falling. At the same time, inventory is finally rising and nearing pre-pandemic levels.
Finally Seeing a Shift to a Buyer’s Market, But It Took Years
So things didn’t happen overnight, but we are finally seeing a return of the buyer’s market after perhaps a decade or longer.
Still, affordability remains poor and high home prices coupled with elevated mortgage rates don’t quite pencil for many prospective buyers.
While President Trump and FHFA Director Pulte are explicitly calling for rate cuts, Powell is signaling a slow and steady approach, as always.
And today he touched on the housing market directly, saying the following:
Powell: “We have a longer run shortage of housing and we also have high rates right now. I think the best thing we can do for the housing market is to restore price stability in a sustainable way and create a strong labor market.”
In effect, he acknowledged that we have a housing problem, whether it’s a lack of supply, lack of affordability, high rates, or high prices. Or all of the above.
He gets it. He knows it’s not ideal. At the same time, he knows we can’t just slash mortgage rates tomorrow and go wild again.
That doesn’t work either, and it’s clear the current dynamic where existing homeowners are sitting on 2-4% fixed-rate mortgages for the next 30 years isn’t fair.
It’s not fair to the renters, to those facing 7% mortgage rates today. But going back to 2-4% rates isn’t the right solution either.
Unfortunately, we have to be patient, and as he said, “restore price stability in a sustainable way.”
5-6% Mortgage Rates, Not 3-4% Mortgage Rates
What that might look like is a 5-6% 30-year fixed rate. Effectively, something in between the rates existing homeowners have and what a prospective buyer could obtain today (or soon).
In other words, Goldilocks mortgage rates that aren’t too hot and not too cold. Something that creates a bridge and allows people to buy and sell homes again.
Problem is, it won’t be quick or easy, and it’ll take more time. And most of all, we need to continue to be patient and let the housing market find its footing.
That being said, the rate cuts will come, you just might need to temper your expectations and instead of hoping for a 3-4% mortgage rate, settle for a 5-6% rate instead.
And because of the tariffs, the government spending bill, the wars, we might have to be extra patient there as well.
He’s basically got it right, as painful as it is (and has been) for housing industry right now. There are no shortcuts is basically what he’s saying and I tend to agree with him.
What this might mean is that cuts are coming, albeit more slowly. Same with lower mortgage rates.
But relief might be more muted, something like a 6% 30-year fixed instead of 7%, or high 5s for certain scenarios.
That could make for better balance over time as supply/demand in the housing market recalibrates.
Just one tiny caveat; there is always room for the unexpected, so even the Fed’s plan could get derailed and the outcome could change, whether that’s even lower mortgage rates sooner or perhaps even higher ones!
Read on: Will mortgage rates still drop to 6% by the end of 2025?
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.