Housing Market Decoded: Why Fed cuts haven’t kept mortgage rates down 

Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.

Over the past few months, mortgage rates have increased even though the Federal Reserve has cut the short-term federal funds rate. Prospective buyers have been frustrated — and in some cases, confused — by the persistent upward movement in mortgage rates.

What explains the seemingly paradoxical relationship between the Fed and mortgage rates?

Mortgage rates rise following cuts

The average rate on a 30-year fixed-rate mortgage hit 6.93% during the second week of January, according to Freddie Mac. This is the highest rates have been since early last July, and it marks the fourth consecutive week of increases.

The onset of the recent upward trend in mortgage rates lines up squarely with the December meeting of the Federal Open Market Committee (FOMC). The FOMC is the body within the Federal Reserve system that is responsible for setting monetary policy. On December 18, the FOMC cut the federal funds rate by 25 basis points. The following week, mortgage rates increased — and have continued to trend upward.

Economic factors add complexity

The disconnect between the federal funds rate and mortgage rates might be surprising. After all, both are related to the cost of borrowing money. When the Fed cuts interest rates, shouldn't overall borrowing costs — including mortgage rates — come down?

It's not quite that straightforward. Compared to shorter-term loans, such as credit cards and auto loans, rates on mortgages are not as strongly tied to the Federal funds rate. Instead, mortgage rates tend to be disproportionately impacted by longer-term economic factors, including inflation expectations and investor sentiment.

So while the FOMC cut interest rates in December, it also released projections about the broader economic conditions that are going to shape monetary policy decisions in 2025. In particular, the Fed's updated projections indicated heightened concern about inflation risks and telegraphed a slower pace of rate-cutting activity in 2025.

The Fed is also watching the labor market, which has been very resilient, with positive job numbers and low unemployment in both December and January. A strong job market leads to the potential for higher inflation as wages grow, and both business and consumer demand increase.

What to watch in 2025: The bond market, inflation and jobs

The prospect of higher inflation means that investors are going to demand higher yields on longer-term bonds, like the 10-year Treasury and mortgage-backed securities. Those higher returns translate to higher mortgage rates for consumers.

Prospective homebuyers and real estate professionals wondering where mortgage rates are headed in 2025 should probably pay close attention to reports on inflation and the labor market. As far as watching the Fed in 2025, words may speak louder than actions. Statements from Fed Chair Jerome Powell and other members of the FOMC — rather than the specific actions taken at Fed meetings — could have more influence over how markets react and where mortgage rates go next.

As of now, the outlook is for mortgage rates to come down in 2025; however, rates are not expected to drop significantly. Nearly all forecasts suggest the average rate on a 30-year fixed rate mortgage will stay above 6%, and it's very likely these forecasts will be revised upward in the first quarter of 2025.

Dr. Lisa Sturtevant has been involved in research on economic, demographic and housing market issues for more than 20 years. She is currently Chief Economist at Bright MLS, where she leads research and forecast activities for Bright and serves as a thought leader on the housing market. The views expressed in this column are solely those of the author.