The Fed Raised Rates Again: Why Mortgage Rates Could Still Eventually Fall

The Federal Reserve raised the Federal Funds Rate by 0.25% this week, bringing its target range to 3.75%–4.00%.

And if you're buying a home, you might assume that means mortgage rates automatically increased by 0.25%.

They didn't.

In fact, mortgage bonds initially rallied following the Fed announcement.

Understanding why tells us quite a bit about where mortgage rates could go next.

The Fed Doesn't Set Mortgage Rates

This is one of the biggest misconceptions in housing.

The Federal Reserve controls a very short-term interest rate called the Federal Funds Rate.

Thirty-year mortgage rates are driven much more heavily by the bond market — particularly mortgage-backed securities and longer-term Treasury yields.

Those markets care about what inflation and economic growth might look like years into the future.

So sometimes the Fed can raise short-term rates while longer-term rates actually fall.

That's essentially what we saw following Wednesday's announcement.

Why Would Bonds Like a Rate Hike?

Because bond investors hate inflation.

Imagine buying an investment that pays you a fixed return for 10 or 30 years.

If inflation stays high, the future dollars you're receiving are worth less.

Investors therefore demand higher yields when they're worried about inflation.

The Fed's decision to raise rates sent a message:

We're still serious about controlling inflation.

That helped restore some confidence in longer-term bonds.

Unfortunately, that doesn't mean mortgage rates are suddenly headed dramatically lower.

The 10-Year Treasury Is Still Near 5%

The 10-year Treasury yield is hovering around 4.98%.

That's an important psychological and technical level.

Mortgage bonds also gave back some of Thursday's gains Friday morning.

So despite the positive initial reaction to the Fed, the broader rate environment remains difficult.

One major reason is oil.

Oil prices remain around $101 per barrel.

Higher energy prices can eventually show up almost everywhere — transportation, airfare, manufacturing, food distribution and consumer goods.

There is potentially some good news.

Saudi Arabia expects to partially restore capacity through its East-West pipeline within days. If additional oil reaches global markets and prices decline, that could help inflation expectations and bonds.

But there are no guarantees.

Housing Is Feeling It

Higher rates are clearly affecting housing activity.

August Pending Home Sales increased just 0.3%, and July was revised downward by the same amount — meaning there was essentially no meaningful monthly improvement.

Pending sales are also down approximately 4.7% from last year.

Housing starts and building permits have weakened as well.

That's not surprising.

Higher mortgage rates increase monthly payments and reduce purchasing power.

But there's another side to this.

Today's Buyers May Have More Negotiating Power

When mortgage rates rise, some buyers leave the market.

That's obviously negative for transaction volume.

But buyers who remain can sometimes gain leverage.

Depending on the property and local market, that can mean negotiating:

• Seller credits

• Price reductions

• Temporary rate buydowns

• Permanent rate buydowns

• Closing-cost assistance

• Repairs or other concessions

That's why looking only at the mortgage rate can sometimes be misleading.

The better question is:

What is the total cost of buying the home, and can we structure the financing intelligently?

What Happens Next?

The market now has to digest the Fed's new position.

Oil and Middle East developments remain major wild cards.

The 10-year Treasury is also sitting just below 5%. A convincing move above that level could create additional pressure on mortgage rates.

On the other hand, declining oil prices, softer inflation or weaker economic data could give bonds some breathing room.

Next week's economic calendar is relatively light, with employment data, Jobless Claims, New Home Sales and Durable Goods Orders among the releases we'll be watching.

For borrowers closing soon, this remains a market where protecting the transaction matters more than trying to perfectly time the bottom.

For buyers with longer timelines, volatility can create opportunities.

And that's exactly why we're watching the bond market every day.