Why Are Mortgage Rates Going Up If the Federal Reserve Cut Rates?

The Weekly Recap

Good morning and happy Friday! The campaign season is mercifully almost over while two heavy hitters in the asset management world don’t believe elections impact markets. Commercial real estate is beginning to have its moment. The Vessel in Hudson Yards has officially re-opened with a new safety net, nationwide home sales are on track for their worst year since 1995, New York City can claim it is now the home to 4 of the worlds top 50 bars and the World Series starts tonight.

If you missed last weeks newsletter on New York City Real Estate’s Incredible September, you can read that through the link.

Why Are Mortgage Rates Going Up If the Federal Reserve Cut Rates?

Last month, the Federal Reserve made a surprising 50-basis-point rate cut, a move eagerly awaited by those trading or investing in real estate. Rates, which had been approaching 6%, briefly shifted downward before reversing course and climbing once again, dampening real estate activity for October. This uptick in rates suggests that the Federal Reserve’s rate cut was already anticipated and factored into the market before it was announced. However, there is another important factor influencing mortgage rates and that is their complex relationship with the bond market. This bond-market link is key to understanding why mortgage rates can fluctuate independently of Federal Reserve actions.

Mortgage rates are tied closely to the yields on long-term government bonds, especially the 10-year Treasury bond. Lenders use the 10-year Treasury yield as a benchmark because the average duration of a mortgage loan (factoring in early payoff, refinancing, etc.) is similar to the maturity of the 10-year bond.

This link exists for two reasons. One, treasury bonds are considered one of the safest investments because they are backed by the US government. Mortgage-backed securities (MBS), which pool mortgage loans and sell them as investments, are riskier because they depend on homeowners making payments. As a result mortgage rates need to offer a premium over Treasuries to attract investors.

Secondly, if investors are buying more Treasury bonds (this occurs during times of economic uncertainty), bond prices rise and yields fall. Lower bond yields lead to lower mortgage rates because the premium required to make mortgage-backed securities also decreases. The inverse has the opposite effect, bond prices fall, yields rise and mortgage rates increase to maintain the premium over treasury yields.

Inflation is also a key factor in influencing both Treasury yields and mortgage rates. Inflation erodes bond returns and since lenders want to make sure those returns are not diminished by inflation, lenders will increase mortgage rates to protect long-term returns.

Although the Fed’s primarily controls short-term interest rates, its actions can indirectly influence long-term Treasury yields and conversely mortgage rates. When the Fed buys long-term Treasuries as it did during its period of quantitative easing (ie lowering rates), it increased demand, driving up bond prices and lowering yields which would lead to lower mortgage rates.

Mortgage rates are sensitive to the bond market, especially the yield on the 10-year Treasury bond. Rising bond yields, often driven by inflation expectations or decreased demand for safe assets, lead to higher mortgage rates. While Federal Reserve influences short-term interest rates, mortgage rates are more influenced by long-term factors such as inflation, investor sentiment and the demand for government and mortgage-backed securities.

Market Performance

Here are how some other indexes and asset classes have performed as of this morning’s opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past WEEK as well as newly signed contracts in Manhattan.

Mortgage Rate Update

The ongoing strength of the economy pushed mortgage rates up once again this week. In recent years, there has been a disconnect between negative economic outlooks and economic data that has consistently exceeded those expectations. As a result, this has caused greater-than-usual volatility in mortgage rates, even amid an improving economy.

News You Can Use

• Blackstone CEO Schwarzman Says US to Avoid Recession Regardless of Who Wins the Election Bloomberg

• BlackRock CEO Larry Fink Says US Elections Tend Not to Have Big Market Impact Bloomberg

• Manhattan’s Long Vacant Retail Spaces Are Finally Rising from the Dead NY Post

• Rate Cuts to Accelerate US Banks’ Move to Higher-Yielding Investments Reuters

• The Commercial Real Estate Recovery Is On, But the Rebound May Be Uneven CNBC

• High End Financial Firms Compete for Luxury Office Space in Manhattan NY Post

• Nationwide Home Sales on Track for Worst Year Since 1995 Wall Street Journal

• Europe’s Economy Poised to Fall Further Behind US Financial Times

• The IRS Announces New Federal Income Tax Brackets for 2025 CNBC

• Refortified Vessel Reopens After Suicide Leaps Shut NYC Landmark for 3 Years NY Post

• Silver and Gold Are Near Record Highs Bloomberg

• New York City is Home to 4 of the Worlds Top 50 Bars Bloomberg

The Deep Insight

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