Weekly Mortgage Rates Are Up, But Market Optimism Persists

The average rate on the 30-year fixed-rate mortgage grew two basis points to 6.35% in the week ending Sept. 25, according to rates provided to SS by Zillow. A basis point is one one-hundredth of a percentage point.

This is quite the change-up from the previous two weeks, which saw double digit basis point drops ahead of the Federal Reserve’s September meeting.

While the Fed doesn’t directly set mortgage rates, APRs will typically move in the direction that lenders expect the federal funds rate to follow. Mortgage rates dropped last week as lenders were confident that the Federal Reserve would vote to lower the federal funds rate.

In fact, the average 30-year APR dipped to just above 6% on September 16, the day before the decision was announced — a level it hasn’t reached in nearly a year.

And, just as predicted, the Fed cut rates by 25 basis points. Hooray! Except, wait, rates are back up again. Why are lenders hiking mortgage rates up if the Fed did exactly as expected?

Mortgage rates are affected by a wide range of economic factors, with lenders responding retroactively to new reports and looking ahead to expected data. In the case of the Fed meeting, it was never likely that rates were going to come down in the immediate aftermath because lenders had already lowered them in anticipation of the committee’s decision.

Mortgage rates are now trending back up largely because the 10-year treasury bond yield has been on the rise even after the Fed’s cut. While the direction of the federal funds rate can influence mortgage rates, bond yields chart a clearer path.

Treasury bonds are considered a more secure investment than stocks and other higher-risk financial products because they’re backed by the government. A higher yield means that bond prices are falling, which happens when investors are confident in the economy (including the real estate market) and aren’t turning to treasury bonds as a safe bet.

This is where we get into a bit of an economic logic problem. When mortgage rates are expected to fall, investors believe the market will perform better because more people will be buying homes. This confidence in the economy can drive bond yields up, which pushes mortgage rates up. Nobody said it was a perfect system.

Data released by the National Association of Realtors (NAR) on Sept. 25 showed sales of existing homes kept about the same pace in August as it had in July, dipping 0.2% month-over-month. On a yearly basis, sales were up in the Midwest and South, and down in the Northeast and West.

Still, NAR chief economist Lawrence Yun was pretty optimistic about the look ahead. “Mortgage rates are declining and more inventory is coming to the market, which should boost sales in the coming months,” he said in the news release.

He also pointed to the “record-high stock market,” suggesting that some current homeowners might be a little more financially flush and have more flexibility to “trade up,” creating momentum among high-end listings.

Yun also acknowledged that buyers are facing a limited inventory of “affordable” homes (for context, the median home price last month was well over $400,000).

Homeowners with more moderately valued homes may feel that today’s APRs are so far above their current rates that they can’t afford or justify a move. But if rates do fall substantially in the coming months, your average homeowner might finally get some of that mobility that wealthier buyers have enjoyed.