For Jill Comfort, a broker and owner of Comfort Realty in Maricopa, Arizona, 2024 has been an unusually challenging year. “Interest rates have been the biggest hurdle,” Comfort shared. “First-time buyers are particularly feeling the pinch as higher rates push monthly payments beyond their reach. Many have decided to wait.”
Even buyers willing to navigate the high-rate environment face an unpredictable market. One of Comfort’s clients began their home search before the Federal Reserve’s rate cuts, only to see mortgage rates rise after securing a loan estimate. “Her monthly payment turned out to be higher than anticipated,” Comfort explained. “It’s incredibly frustrating.”
This frustration isn’t isolated. Mortgage rates have continued to climb despite multiple rate cuts by the Federal Reserve. On September 18, when the Fed initiated its first rate cut of the year, the average 30-year fixed-rate mortgage was 6.09%. By December 19, following three Fed rate cuts totaling a full percentage point, mortgage rates had risen to 6.72%, according to Freddie Mac.
The Federal Reserve’s rate adjustments directly influence the overnight lending rates between banks
Factors such as expectations for inflation, fiscal policies, and overall economic growth heavily influence bond yields. When investors anticipate higher inflation, they demand greater returns to offset the erosion of purchasing power. This leads to higher yields and lower bond prices. Since mortgages track these yields, rates rise accordingly.
Why Are Mortgage Rates Higher Than Treasury Yields?
Although mortgage rates generally move in tandem with Treasury yields, they consistently maintain a significant spread. For instance, on September 18, the 30-year fixed-rate mortgage stood at 6.09% while the 10-year Treasury yield averaged 4.10%.
This gap exists because mortgages carry more risk compared to government-issued debt. Homeowners can default on their loans, and they also have the flexibility to refinance without penalties, potentially disrupting the cash flow for investors holding mortgage-backed securities. To compensate for these uncertainties, investors demand higher yields on mortgage-related investments.
Why Are Mortgage Rates Climbing?
The primary driver behind rising mortgage rates is increasing economic uncertainty and persistent inflationary pressures.
“Inflation has barely shifted since last December,” said Selma Hepp, chief economist at CoreLogic. “This final stretch toward achieving the Federal Reserve’s 2% inflation target has proven far tougher than anticipated.”
Even as inflation cools, concerns about economic growth, the national debt, and fiscal deficits contribute to elevated yields in the bond market. “We’re looking at stronger-than-expected economic performance, which naturally supports higher long-term interest rates,” Hepp noted.
Additionally, mortgage-specific risks have risen due to historically high rates persisting over the last two years. Investors fear heightened prepayment risks, as homeowners with existing high-interest mortgages might refinance en masse if rates drop significantly.
The Broader Impact
This environment of uncertainty complicates the pricing of mortgages. “It’s challenging to price loans accurately when so much remains in flux,” Hepp added.
While the Federal Reserve has made strides in controlling inflation, the path forward is uncertain. As Fed Chair Jerome Powell recently acknowledged, “Achieving our inflation target remains a complex challenge.”
For now, prospective homeowners and mortgage investors alike are navigating a landscape marked by unpredictability and elevated rates, underscoring the challenges of today’s economic environment.
