What Fed’s benchmark rate cut means for mortgages

Hoping that mortgage rates will keep dropping following the Federal Reserve's first rate cut since last year? Don’t bank onit.

- By ALEX VEIGA

THE FED'S rate cut does not necessarily mean home mortgage rates will keep declining, analysts say.

As expected, the central bank delivered a quarter-point cut Wednesday and projected it would lower its benchmark rate twice more this year, reflecting growing concern over the U.S. job market.

Here’s a look at factors that determine mortgage rates and what the Fed’s latest move means for the housing market:

How rate cuts affect mortgage rates

Mortgage rates have been mostly falling since late July on expectations of a Fed rate cut. The average rate on a 30-year mortgage was at 6.35% two weeks ago, its lowest level in nearly a year, according to mortgage buyer Freddie Mac.

‘A similar pullback in mortgage rates happened around this time last year in the weeks leading up to the Fed's first rate cut in more than four years. Back then, the average rate on a 30-year mortgage got down to a two-year low of 6.08% one week after the central bank cut rates.

But it hasn’t come close to that since. Mortgage rates didn’t keep falling last year, even as the Fed cut its main rate two more times. Instead, mortgage rates rose and kept climbing until the average rate on a 30-year home loan reached just over 7% by mid-January.

Like last year, the Fed’s rate cut doesn’t necessarily mean mortgage rates will keep declining, even as the central bank signals more cuts ahead.

“Rates could come down further, as the Fed has signaled the potential for two more rate cuts this year,” said Lisa Sturtevant, chief economist at Bright MLS. “However, there are still risks of a reversal in mortgage rates. Inflation heated up in August and if the September inflation report shows another bump in consumer prices, it’s possible we could see rates rise.”

How mortgage rates are set in the U.S.