PHILADELPHIA (KYW Newsradio) — Despite hopes that the Federal Reserve’s interest rate cuts last year would drive down the borrowing rate for home loans, mortgage rates are hovering around 7%. A positive end-of-year jobs report is partly to blame, says a financial analyst.
The Fed’s interest rate cuts have not had much effect on long-term borrowing, because mortgage rates are tied to 10-year treasury bonds.
“What the Fed effectively controls is the price of money—but the way they do that is with a short-term interest rate,” said Greg McBride, chief financial analyst at Bankrate.
“And that short-term interest rate doesn’t always dictate what happens with longer-term rates. And that’s why you can see the Federal Reserve zig, and mortgage rates zag—which is exactly what we’ve seen in recent months.”
The U.S. ended the year with a hotter-than-expected jobs report. The Labor Department reports 256,000 jobs were added in December. Nearly 100,000 more than were forecasted. The data indicates the Fed will not cut rates this year.
“If they are going to reduce rates further, it’s going to hinge on inflation,” said McBride. “The progress on inflation has stalled out in recent months. That needs to change.”
McBride says investors will be closely watching Wednesday’s Consumer Price Index report to get an idea of how investors are leaning.
“You know the bad inflation report is not gonna be good news for mortgage rates or long-term interest rates, in general. An investor’s worst enemy over the long term is inflation,” McBride said.
Home prices surged after the pandemic at a pace wages could not keep up with, McBride explained. Mortgage rates have remained stubbornly high, and it’s going to take a while before homes are affordable again.
“Allowing buyer incomes to catch up,” he said. “That will improve the fundamentals, but that doesn’t happen overnight. That is something that will unfold over the next few years.”
McBride says now is the time to be patient, increase savings, and invest in your career.
“If you get that certification, or finish that degree or do that type of thing that gets you the next promotion—all of a sudden, homeownership could look much more tenable 12 to 24 months from now, when you’re at a higher pay grade, than it does today.”