For Jill Comfort, a real estate broker from Maricopa, Arizona, the year 2024 has been quite sluggish.

“Most of this slowdown is due to interest rates,” Comfort shared with YSL News. “Many first-time buyers are having a tough time entering the market due to elevated interest rates, which are significantly increasing their monthly payments. A lot of them have decided to wait it out.”

For those buyers willing to take a chance, the housing market has proven to be unpredictable.

One of Comfort’s clients got a mortgage estimate just before the Federal Reserve’s announcement to reduce rates. “Then rates started climbing again, and now her payment will actually be higher than what we initially discussed,” she explained. “It’s very frustrating.”

This scenario is not unique. On September 18, following the Fed’s first rate cut of 2024, the average rate for a 30-year fixed mortgage was 6.09%. Fast forward three months to just after the central bank announced its third rate cut of the year, and the federal funds rate dropped by a full percentage point. Yet, mortgage rates have surged close to that amount, with the 30-year fixed mortgage averaging 6.72% in the week ending December 19, according to Freddie Mac’s data.

So, what’s happening?

Mortgages Are Linked to Bonds, Not Directly to Bank Rates

The Federal Reserve primarily regulates the interest rates at which banks lend to one another overnight. However, mortgages typically have longer terms, so they are more closely linked to 10-year U.S. Treasury notes, which are government-issued debts traded in the bond market.

Fannie Mae, a key player in mortgage underwriting, recently detailed in an article how various factors like investor expectations concerning monetary policy, economic growth, and inflation influence rates for 10-year Treasury notes.

If investors foresee higher inflation, they will demand greater yields to avoid losing value on their investments. Conversely, when inflation fears increase, it tends to cause the prices of interest-bearing investments to drop, as bond prices decrease when yields rise, and vice versa.

Why Are Mortgage Rates Higher Than Bond Yields?

Even though mortgage rates move in tandem with the bond market, there remains a significant “spread,” or gap, between them. On September 18, when the average for a 30-year fixed-rate mortgage was at 6.09%, the average yield for the 10-year Treasury was only 4.10%.

Mortgages carry a higher risk than government-issued debts because individual homeowners frequently default on loans.

Taking into account that homeowners can refinance freely, often without penalties, it adds further risk to mortgages. Therefore, investors and institutions purchasing mortgages and mortgage bonds often require a higher yield – this results in lower prices, as previously mentioned.

But Mortgage Rates Are Not Only Staying Steady – They Are Increasing

Simply put, this is due to rising risks.

“Inflation has remained relatively stable since last December, implying that the final hurdles will be trickier than many anticipated,” remarked Selma Hepp, chief economist at CoreLogic.

Although the Fed has made commendable strides in controlling inflation, achieving its 2% target remains a challenge. Policymakers acknowledged this concern when they projected fewer rate cuts will take place in 2025 than initially estimated.

“Inflation has stagnated,” Fed Chair Jerome Powell stated during a news briefing, noting that reaching the 2% inflation goal has “kind of fallen apart” as the year draws to a close.

Looking ahead, there seems to be no reason to expect a rebound in the bond market, according to Hepp. “Concerns surrounding debt and deficits, coupled with expectations of continued robust economic growth, necessitate a higher natural rate of interest.”

Meanwhile, mortgages face their own challenges: after seeing high rates for home loans persist over the past two years, investors are increasingly wary of potential prepayment risks, Hepp noted.

“We’re in a time of heightened unpredictability,” Hepp concluded. “It’s challenging to accurately price mortgages when there’s little certainty.”