Why Aren't Mortgage Rates Dropping?

It is a common assumption that when the Federal Reserve lowers interest rates, mortgage rates will drop too, but that is not exactly how it works. While the Fed controls short-term rates, mortgage rates are tied to long-term factors like the 10-year Treasury bond yield. This is relevant because recently, we saw Fed rates go down while mortgage rates went up, leaving many confused.

Main Points:

1. The Connection Between Treasury Bonds and Mortgage Rates:

   • Mortgage rates tend to follow the movement of the 10-year Treasury bond yield. When Treasury yields rise, mortgage rates often increase, and when they fall, mortgage rates usually follow.

   • This relationship exists because mortgage-backed securities compete with Treasury bonds for investor interest, so lenders base rates on bond performance.

2. Why Mortgage Rates Remain High Despite Fed Cuts:

   • Treasury yields have remained above average due to concerns about inflation and economic conditions. As of January 9, for example, the average mortgage rate was 6.93%, which was 2.25% higher than the 10-year Treasury bond yield of 4.68%.

   • Lenders factor in this spread to account for the added risk of mortgages compared to government bonds, which are seen as safer investments.

3. What This Means for Buyers and Sellers:

   • For buyers: While the Fed’s actions can influence mortgage rates indirectly, the bond market plays a bigger role. Do not wait on the Fed instead watch Treasury yields.

   • For sellers: Elevated mortgage rates may persist for some time. Pricing your property competitively can help attract serious buyers in today’s market.