Will a Rate Cut Lower Mortgage Rates?

WASHINGTON — Jay Powell's dovish turn at Jackson Hole should be welcome news to would-be homebuyers.

The average mortgage rate on a 30-year fixed is around 6.6%, according to government housing agency Freddie Mac. That's high compared to those 4% and 3% bargain basement rates homebuyers enjoyed early on post-COVID.

But if the Fed does lower its benchmark rate next month, that doesn't necessarily mean mortgages or the housing market will get instantly cheaper.

The Fed controls the federal funds rate – the short-term interest rate banks charge each other for overnight loans. It does not control the interest rate paid on longer-term government debt, like the 10-year Treasury note.

"And the mortgage rates are affected much more by the 10-year interest rates than the very short-term interest rates," said Amir Kermani, a real estate professor at UC Berkeley's Haas School of Business.

Fed rate cuts do put downward pressure on longer-term rates, he said, but investor worries about America's ability to pay that debt in the future can keep those rates elevated.

"Unless we have some reaction in those longer-term interest rates, I mean, the mortgage rates perhaps are going to stay where they are," Kermani said.

Mortgage rates are also an expectation game. Economist Kara Ng at Zillow said that because the Fed has been hinting at easing monetary policy for a little while now, mortgage rates already partially reflect that.

"A lot of that information on what the Fed is going to do in September is already priced in," she said. "So just because the Fed is likely going to cut interest rates in the September meeting does not mean the mortgage rate is going to fall."

Ng added that even if mortgage rates do drop in the future, it's no guarantee the frozen housing market will defrost. Prices are still high, and broader economic uncertainty is sidelining many buyers.

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