Fed pause won’t lower mortgage rates, economists say
The Federal Reserve held interest rates steady Wednesday, a decision that does little for homebuyers facing mortgage rates near 7.3% and builder confidence that is at a 14-year low.
The Federal Open Market Committee kept its benchmark rate at 3.75% to 4% on a 10-2 vote, according to the Fed’s policy statement. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, preferring a quarter-point increase. September’s decision was unanimous.
The rate that prices a mortgage is not the one the Fed sets. The 10-year Treasury yield, which mortgage rates track, traded just above 5% Wednesday afternoon, according to Tradeweb data. Freddie Mac put the average 30-year fixed mortgage at 7.32% last week, up from 6.19% a year earlier. That is a gap of more than a full percentage point built up over a year in which the Fed raised short-term rates once.
“For homebuyers, today’s decision changes very little,” said Orphe Divounguy, The Center Square’s economist. “The Fed doesn’t directly set mortgage rates. Financial markets do, based on expectations for inflation, economic growth, future interest rates and the risks associated with mortgage-backed securities.”
His research found that about half of a change in the 10-year Treasury yield reaches mortgage rates the same day, and about two-thirds within two days.
Builder confidence fell three points to 29 in October, the lowest reading since June 2012, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
Buyer traffic dropped to 18, which National Association of Home Builders Chief Economist Robert Dietz said in the NAHB’s Oct. 19 release was the weakest since April 2012, excluding the start of the pandemic. Margins are being compressed by rising costs and incentive use, Dietz told The Center Square.
Forty-three percent of builders cut prices last month, the highest share since 2020, and 65% offered sales incentives.
In written commentary after the decision, Mortgage Bankers Association Chief Economist Mike Fratantoni said rates at three-year highs are “causing a sharp slowdown in home sales, mortgage originations, and in commercial real estate markets.”
Although the Fed held Wednesday, he said, markets have already priced in at least two more increases, and “we do not expect any significant relief in mortgage rates over the forecast horizon.”
Fed Chairman Kevin Warsh said tighter financial conditions are how the policy is meant to work.
“The dominant means in which this policy is going to be put into practice is we are tightening financial conditions,” he said at a news conference after the decision. “They’ve tightened a bit since we met last time. That isn’t something that we’re uncomfortable with.” He said the goal “isn’t to throw sand in the gears of the economy and throw people out of work.”
At least five of the 12 Federal Reserve districts attributed weaker housing or real estate demand to higher long-term or mortgage rates in the Fed’s October Beige Book, based on information collected through Oct. 5. In Atlanta’s district, some builders said they expect mortgage rate buydowns to become a permanent sales tactic.
The National Association of Home Builders tied last month’s jump in long-term yields to forces beyond Fed policy, including elevated oil prices and geopolitical tension, the federal deficit, weak demand at Treasury auctions and “strong competition for capital from AI and hyperscaler investment.”
Hammack signaled her position two weeks before the meeting. In an Oct. 12 speech in Cleveland, she said a restrictive stance was appropriate to ensure “a timely return to 2 percent inflation.” She also said that with the recent rise in yields, she viewed financial conditions as “neutral rather than holding demand back.”
Fed projections released in September pointed to another quarter-point increase before year-end. Warsh declined to say whether support for another hike this year remains widespread, saying he does not believe in forward guidance outside a crisis.
Inflation ranked among the top three issues for 46% of registered voters in a Center Square Voters’ Voice Poll conducted Oct. 5-7 by Noble Predictive Insights, up nine points since March. The survey of 2,527 registered voters has a margin of error of plus or minus 1.95 percentage points for the full sample. Inflation led among Democrats and Democratic-leaning voters at 47%, Republicans and Republican-leaning voters at 45% and true independents at 48%. Voters go to the polls Nov. 3.
Sunny
