Here’s why mortgage rates are rising after the Fed’s rate cut

Washington (CNN) — US mortgage rates rose again this week, the fourth-straight weekly increase. That rise in borrowing costs has undone some of the relief Americans felt this summer when mortgage rates fell in anticipation of a rate cut from the Federal Reserve as inflation improved.

The average rate on a standard, 30-year fixed mortgage was 6.54% in the week ending October 24, according to a survey of lenders by Freddie Mac released Thursday. That’s the highest level since early August, but still below this year’s high of 7.22% seen in early May.

Expectations of a Fed rate cut caused mortgage rates to drop to a two-year low of 6.08% in late September, but it failed to spur homebuying activity. Sales of previously owned homes, which make up the vast majority of the market, fell 1% in September from the prior month to a seasonally adjusted annual rate of 3.84 million, the National Association of Realtors said Wednesday, the lowest rate since October 2010. Mortgage applications have also declined over the past four weeks, falling to the lowest level since July, according to a separate report from the Mortgage Bankers Association out Thursday.

Sluggish housing demand could be because lower rates came too late for the majority of home seekers: Many families prefer to buy and sell homes in spring, when the weather is warmer and they can plan ahead for the new school year. Prospective buyers might also be waiting on rates to come even lower, since the Fed has made it clear it will continue to pare back borrowing costs through 2025.

Every percentage point on a mortgage rate makes a big difference for that monthly payment. But a persistent lack of homes on the market is continuing to push up home prices, which climbed in September for the 15th consecutive month, according to NAR data — on top of skyrocketing home insurance costs in some markets.

Here’s what’s driving the recent upswing in mortgage rates.

Strong economic data

When the Fed cut interest rates last month, many hoped it would kick-start the frozen housing market. Mortgage rates track the 10-year US Treasury yield, which was expected to fall in anticipation of further rate cuts. But recent economic data has looked stronger than expected, which has shifted the market’s expectations, sending bond yields higher.

For example, the government’s latest batch of employment data released earlier this month showed that monthly job growth in September was much better than expected. More recently, a separate report on retail spending released last week showed that consumer demand, a key driver of the US economy, remains solid. Further data like that could slow the pace of rate cuts.

“Over the last few years, there has been a tension between downbeat economic narrative and incoming economic data stronger than that narrative,” Sam Khater, Freddie Mac’s chief economist, said in a release. “This has led to higher-than-normal volatility in mortgage rates, despite a strengthening economy.”

The 10-year yield closed Wednesday at 4.24%, the highest level since late July. Higher yields mean lower bond prices, with investors demanding higher interest payments to hold government debt.

The government’s finances

The bond market might also be influenced by factors around the government’s finances.

One of them is the upcoming presidential election and rising bets that former President Donald Trump could clinch a win. He and Vice President Kamala Harris, according to some projections, have suggested policies that would significantly add to the strain facing the federal budget in the coming years. A recent report from the nonpartisan Committee for a Responsible Federal Budget estimated that under a second Trump presidency, the US national debt could balloon by $7.5 trillion by 2035, compared to an increase of $3.5 trillion under a Harris presidency during the same time period.

“We’re going to be broke really quickly unless we get serious about dealing with our spending issues,” billionaire investor Paul Tudor Jones told CNBC Tuesday. “I am clearly not going to own any fixed income.”

The government’s fiscal situation might already be having an impact on mortgage rates.

“We have this large budget deficit, so any time the government has to borrow, borrow and borrow, that just means that there is less mortgage money available for lending into the housing market, all else equal, so maybe the deficit is also hindering some of the mortgage rate decline potential,” Lawrence Yun, NAR’s chief economist, told reporters Wednesday.

Waiting on relief

For Americans whose finances are tight, waiting for housing affordability to improve is their best shot at the American Dream of homeownership.

Kimberly Bradley and her husband, Zach, have two toddlers. They rent a townhome in Manteo, North Carolina, and want to buy a house but they are living paycheck to paycheck and have not been able to save up for a down payment. Kimberly, 22, is a caseworker, while Zach, 23, recently began working for the US Postal Service.

She said that her family is waiting for rates to come down.

“I’ve been told by a lot of people to just go ahead and buy a house right now, but I don’t want to be stuck with a rate I don’t like for years only to have to refinance,” Kimberly said. “I want to know that the rate I have at the moment is good and that I can have that for a while. That’s my biggest thing. I don’t want to refinance. I want to have a good rate from the start.”

For Ken Lowrey, a 27-year-old renting in Charleston, South Carolina, “homeownership is the absolute goalpost of security,” he said.

But his budget is stretched thin with his rent increasing, he said, and especially after he dealt with an unexpected health issue that completely drained the $7,000 he saved up. He said he has also had to use his credit cards to cover everyday costs.

Since homeownership is an important goal for him, he said he has put off “having kids to saving for retirement to even fully committing to a career path.” Lowrey is also waiting for the market to improve, whether it comes from lower mortgage rates or declining home prices, he said.

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