When mortgage rates spiked from 3.5% to nearly 7% in 2022, the Covid-era housing boom was brought to an abrupt end. The sustained high rates have frozen the market, making homeownership pricier for buyers and discouraging sellers from listing properties.
Many potential buyers have opted to delay buying a home until rates drop to a more palatable level, making the financial commitment more affordable.
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Though the federal funds rate isn’t the main determinant of mortgage rates, it does influence borrowing costs, which factors into mortgage rates. Lower interest rates also improve consumer confidence, raising homebuyer confidence.
The Fed has held interest rates at every meeting this year, and the central bank stuck to the same strategy at the May Board of Governors meeting yesterday. Homebuyers waiting for a boost in the housing market or a mortgage rate drop may have to wait for the next Fed meeting in June.
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Homebuyers are paying close attention to Fed moves, interest rates, and mortgage rates
The housing market has been stagnant for the past few years, as buyers and sellers wait for mortgage rates to drop.
Although the federal funds rate doesn’t directly shape mortgage rates, the 10-year treasury yield does, and it tends to drop in anticipation of a Fed interest rate cut.
It was widely believed that the Fed would hold interest rates steady at their current level between 4.25% and 4.50% at the May board meeting. Still, younger homebuyers hoping for housing market relief may be disheartened — and will continue closely monitoring the Fed’s movements for the remainder of the year.
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Up until October 2024, mortgage rates mirrored the federal funds rate, meaning that an interest rate cut would likely mean a mortgage rate drop.
However, stubborn mortgage rates have been largely unaffected by the Fed’s interest rate cuts last year, breaking with its historical tendencies and dampening homebuyer sentiment.
There may be hope on the horizon for homebuyers in Q3. Though the Fed will likely hold rates again at the June meeting, CME FedWatch forecasts an 51.1% chance that the Fed will cut rates in July and make another potential rate cut in September.
Younger buyers are more particular about housing market conditions
Younger homebuyers have faced a tumultuous housing market over the past five years. Constant fluctuations in mortgage rate, prices, and supply have made it difficult to find the right time to buy a home.
Now, younger generations have become apprehensive about buying a home in these conditions. The BMO Real Financial Progress Index found that 69% of Gen Z renters and 74% of Millennial renters are waiting for mortgage rates to fall before buying a home.
Related: Morgan Stanley predicts major mortgage rate changes are coming soon
Mortgage rates and the general lack of affordability remain a top concern for younger homebuyers, prompting many to delay homeownership for years. The median first-time homebuyer age reached 38 last year, the highest on record.
BMO Chief U.S. Economist explains that while housing market conditions aren’t ideal, they could turn around soon, and financial preparedness will be key.
“The financial hurdles to owning a home have rarely been higher, especially for young households that don’t yet have their foot in the door,” he said. “Poor housing affordability, limited inventory of existing homes, and rising interest rates make finding the right home that fits your budget a challenging endeavor.”
“The good news is economic and financial conditions can change quickly, so it makes sense to start planning today.”
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
