Federal officials met consensus expectations and left monetary largely unchanged on Wednesday, disappointing some in the industry anticipating tariff-related pessimism could prompt a downward rate move, but their inaction could nevertheless have a short-term upside for lenders.
"Mortgage rates will drop a bit this week as bonds have cheered the Fed's decision to leave rates alone," said Melissa Cohn, regional vice president at William Raveis Mortgage, noting that the officials decided on inaction despite the fact that
In the medium-term, however, the current state of monetary policy leaves mortgage rates in a place where traditional first-lien lending and single-family housing activity could remain low, putting prolonged pressures on mortgage lenders to diversify into other sectors like second-lien products.
What the Fed announcement means for mortgage lenders
Without a downward move in short-term interest rates the Federal Open Market Committee can control directly or a change in its bond purchases, monetary policymakers' actions are unlikely to reboot a slowing housing market, said Aaron Terrazas, an economist at
"All of these forces seem to be putting a higher floor on rates," he said. "We're not going to see a sudden surge in homebuying and selling, which means people are having to make the most of where they live."
The long-term primary mortgage rates that currently dominate the market aren't historically that high, but they're still above record-low pandemic levels back at the outset of the decade, leaving a lot of borrowers with older loans they don't want to give up.
"One thing is for certain: interest rates are highly unlikely to dip down to 2021 levels, when rates hovered around 3%," said Selma Hepp, chief economist at Cotality, in an email. "We foresee a 6% mortgage rate, or higher, to be the new normal for the 30-year fixed mortgage for the next two years."
Mortgage bonds were trading a couple basis points higher on the day in line with indications rates could inch down this week as a result, according to Better Chief Financial Officer Kevin Ryan.
"As an American citizen I think everything Powell says makes sense, for somebody who is running a mortgage business I think we're going to open tomorrow with the same macro environment," he said. Ryan noted, however, that his company has seen some uptick in volume even in the current rate scenario.
"Despite the meaningful volatility in the capital markets it's been a little better these last couple weeks as it relates to volumes we're seeing, including home equity," he said. "In our customer base, I think volatility has convinced some people to consolidate debt."
What the Fed may do in the coming months
The committee's statement issued at the close of its meeting and Chairman Jerome Powell's subsequent press conference indicated that officials are well aware of some of the negative indicators in the market that could argue for a rate cut, but are reluctant to move because of other signs of economic strength.
Their comments indicate a rate cut wasn't out of the question in the foreseeable future given that
"The underlying inflation picture is good. It's what you see, which is inflation now running a bit above 2% and we've had basically decent readings in housing services and non-housing services, which is a big part of it. So that part, I think, is moving along well. But there's just so much that we don't know," Powell said.
Powell acknowledged sentiment readings have become markedly negative in some instances but noted that he would want to see more hard evidence of economic weakness before lowering rates in response.
"If that continues and nothing happens to sort of alleviate those concerns, then you would expect that to begin to show up in economic data. It wouldn't maybe show up overnight, but it would show up over weeks and months. And that may be what happens, but hasn't happened yet," he said.
