Mortgage Rate Climb Driven by Optimism

WASHINGTON — The Federal Reserve has cut short-term interest rates by 25 basis points. Nevertheless, mortgage rates went up again.

The average rate on the 30-year fixed-rate mortgage climbed 11 basis points in the week ending Nov. 7, to 6.86%, according to rates provided to NerdWallet by Zillow. A basis point is one-one hundredth of a percentage point.

Observers struggle to pinpoint why rates went up. The October employment report, released Nov. 1, showed weaker-than-expected job gains. Normally, mortgage rates would drop, or at least level off, in reaction to a disappointing jobs report. But the 30-year mortgage edged higher.

Markets might have concluded that the job market's poor showing in October springs from temporary factors: labor strikes and business closings caused by hurricanes Helene and Milton. In that case, investors concluded that people would soon get back to work and that the weak jobs number didn't foreshadow a faltering economy. That line of reasoning gave mortgage rates the green light to keep rising.

Mortgages and Fed move in opposite directions

This week's increase in mortgage rates marked the continuation of a brutal seven-week period in which the 30-year mortgage rose almost a percentage point. It rose from 5.89% in the week ending Sept. 19 to 6.86% in the week ending Nov. 7.

Mortgage rates skyrocketed even as the Fed cut the overnight federal funds rate twice: by half a percentage point on Sept. 18 and by a quarter of a percentage point on Nov. 7. This goes to show that mortgage rates sometimes zig when the Fed zags. Not usually, but sometimes.

The disconnect between the federal funds rate and mortgage rates arises from their different durations. Banks pay the federal funds rate on money they borrow for one night. Homeowners pay their mortgage rate on money they borrow for up to 30 years, or around 11,000 nights.

The long-term economic outlook doesn't matter much for an overnight loan, but it matters a great deal for a 30-year mortgage. Optimistic economic expectations push upward on mortgage rates. This autumn's rise in rates reflects these buoyant prospects.

The Fed approaches its goal

The Federal Reserve's recent stewardship contributes to the optimism. Inflation has faded, approaching the Fed's goal of 2%. Meanwhile, total economic output grew at an annual rate of 2.8% in the third quarter, according to the Bureau of Economic Analysis.

"Recent indicators suggest that economic activity has continued to expand at a solid pace," the Fed explained in a statement. "Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2% objective but remains somewhat elevated."

The Fed wants to get inflation under control while preventing a recession: a difficult-to-achieve task known as a soft landing. The central bank raised interest rates in 2022 and 2023 to corral inflation. It has reduced the overnight rate in its last two meetings to support economic growth and dodge a recession.

Trump rally carries rates higher

Donald Trump's victory contributed to the rise in mortgage rates due to what a Wall Street Journal headline called an "epic, postelection rally." The article exclaims, "Wall Street has rarely been more excited by an election." As the election results came in, the investor class's elation manifested in higher yields on government debt. Mortgage rates followed.

"Bond yields are rising because investors expect Trump's proposed fiscal policies to widen the federal deficit and reverse progress on inflation," said Lisa Sturtevant, chief economist for Bright MLS, a database of properties for sale in the mid-Atlantic region.

But the Journal offered a more optimistic appraisal: the prospect of "four years of tax cuts, deregulation and economic expansion."

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