“The Fed’s pause on rate cuts confirms what Treasury yields have been telling us — inflation risks are likely to keep mortgage rates high in the near term,“ Eric Orenstein, senior director at Fitch Ratings, told HousingWire in a written statement. “Mortgage refis could still pick up if long-term rates fall around 75 bps, but there is clearly less momentum than there was even three months ago.”
David Sober, senior vice president of enterprise business development at Voxtur Analytics, said that “the Fed’s decision to keep rates untouched is likely a long-term trend, with interest rate reduction not expected until the second half of the year. This keeps the housing economy in an extended period of malaise, with affordability at its lowest point in memory.
“Independent mortgage banks will continue to dominate the mortgage market due to the ability to offer more innovative ways to buy homes. It will be a pleasant surprise if mortgage rates dip to 6% in 2025,” Sober added.
Melissa Cohn, regional vice president at William Raveis Mortgage, said in written commentary on Wednesday that market observers should keep their eyes on the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index.
Data for December will be released Friday, and the annualized growth for the PCE index has floated between 2.1% and 2.4% since August, slightly above the Fed’s target inflation goal of 2%. This data could provide a better road map of where rates are headed before the Fed’s next meeting in mid-March.
Cohn also said that Fed policymakers have remained an “independent body and will not just lower rates if asked,” a direct reference to calls from President Donald Trump to lower the federal funds rate and spur economic growth — including more home sales.
“Mortgage rates will move with inflation and employment data, as always, even with all the uncertainty behind President Trump’s implementation of his new policies and the impact on inflation and the economy. … There are a lot of unknowns at the moment,” Cohn said.
“President Trump is working fast to implement many of his desired policies and campaign promises. So far, there has been little, if any, impact. It will take time to see how everything plays out in Washington and how the new policies impact inflation and the economy.”
Even as the Fed funds rate has been lowered by a total of 100 bps since September, mortgage rates have gone in the opposite direction. Since Sept. 18, when the Federal Open Market Committee (FOMC) announced its first rate cut since March 2020, the 30-year conforming loan average has shot up from 6.31% to 7.12% as of Wednesday.
Mortgage rates tend to more closely follow the direction of Treasury yields. HousingWire Lead Analyst Logan Mohtashami noted that the spread between the 10-year Treasury and the 30-year mortgage rate has narrowed significantly since peaking in June 2023.
“The U.S. housing market would have been much worse without better spreads in 2024 and now going into 2025,” Mohtashami wrote on Saturday. “If we applied the worst spread levels from 2023 to today’s rates, we would see an increase of an additional 0.79% in the mortgage rate — getting near 8%. On the other hand, if mortgage spreads were at their typical levels, we could expect mortgage rates to be approximately 0.74% to 0.84% lower than they are now, which means mortgage rates near 6%.”
Although Trump might not have much direct influence over mortgage rates, his newly confirmed Treasury Secretary, Scott Bessent, could. Bessent has suggested that Fannie Mae and Freddie Mac could use some of their earnings to buy mortgage-backed securities, which would narrow the spreads and potentially create lower mortgage rates to spur more home purchases and refinances.
“This scenario is more likely than President Trump requesting funding from Congress to lower mortgage rates,” Mohtashami added.
CoreLogic chief economist Selma Hepp noted that the pause on rate cuts should continue to benefit the market for new homes, which has been performing better than existing homes for a while.
“The nation’s economy continues to be resilient against long-term economic setbacks, which means that the Fed is in no imminent need to continue its rate cuts,“ Hepp said in a statement. “With mortgage rates expected to remain higher for longer and with limited inventory, existing home sales activity keeps reaching new lows. In contrast, home builders have added more new homes last year and continue to offer rate buydowns on new construction, keeping those sales strong.”
Editor’s note: This is a developing story and will be updated following Fed Chair Jerome Powell’s press conference on Wednesday. It has been updated with commentary from Fitch Ratings, Voxtur Analytics and CoreLogic.
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