While the Federal Reserve has reduced its short-term interest rate target by three-quarters of a percentage point since mid-September, 30-year fixed-rate mortgage rates have risen almost as much over that period and have recently averaged around 6.8%. , higher than they were when the Fed began cutting interest rates, according to Freddie Mac, the mortgage financing giant.

Small business loan rates are also on the rise: Average interest guaranteed by the Small Business Administration for new home and capital improvement loans has increased more than half a percent since September, according to data collected by CDC Small Business Finance, one of the largest lenders in this program.

To be sure, the central bank’s target rates and its recent high-profile rate cuts do not directly set rates for long-term mortgages and business loans. It’s not uncommon for rates on multi-year loans, such as 30-year mortgages, to move slightly against the Fed’s short-term goals, analysts say.

But the recent gap, with Fed and bank rates moving in opposite directions, “is actually quite different” from the usual outcome after a Fed hike, said Lara Rhame, chief economist at FS Investments in South Philadelphia.

It is “abnormal” for rates to fall while the economy is doing well, she said – a sign that money market participants are worried about inflation under a one-party government while politicians “can spend with fewer safeguards,” likely leading to faster growth and higher prices. inflation.

Rhame said his research on the Fed’s past performance suggests long-term mortgage rates could remain at or above 5% next year.

“It’s a huge frustration for all the people who were excited about buying a home once the federal government started cutting interest rates,” she added.

Eric Merlis, co-head of global markets at Citizens Financial Group, which operates the Philadelphia region’s largest bank branch network, said long-term rates reflect the economy’s growth prospects.

When mortgage and business loan rates rise despite Fed cuts, it suggests that lenders are concerned that inflation, economic growth, and the prices of real estate, stocks, and other assets will fall. deteriorate.

Mortgage applications increased after the election

Mortgage applications slowed during the recent presidential campaign, as if buyers were waiting to see who would win, but calls from potential buyers have increased since Donald Trump’s election, said Michael A. Kent, a banker experienced mortgage broker at the Berwyn office of the First National Bank of Pennsylvania. .

“I have received more calls since Thursday than in the last three weeks,” he said in an interview last week. But there still aren’t many homes for sale, locally or nationally, relative to demand, Kent added.
Nationally, “home search activity was much slower than expected” during the presidential campaign, national real estate brokerage Redfin reported last week.

“Buyers are coming back” since Trump’s election, but “we don’t expect a significant rate cut in the near future,” said Chen Zhao, an economics researcher at Redfin.

Rhame, the FS analyst, said that even if the Trump administration wants to increase U.S. housing construction, it would have to push local governments to speed up project approvals — a challenge for national leaders.

Kent, the mortgage banker, noted that the Fed’s rate cuts have more of an impact on credit cards, auto loans and other short-term borrowing than on commercial and mortgage loans. If mortgage rates remain high, he expects more buyers will apply for adjustable-rate loans, as if betting rates will fall over the next few years.

Analysts say high mortgage rates reflect, in part, expectations that inflation would rise next year — for example, if the Trump administration keeps its tax cut promises without correspondingly reducing major categories of US government spending: medical care, social security, military. and debt service.

Kent added that any measures by the Trump administration to accelerate the economy more than expected – for example by expanding fossil fuel development and reducing gasoline prices – would be a welcome deflationary surprise and could lead to a lower interest rates.

When could mortgage rates drop?

Standard 30-year mortgages likely won’t decline until yields on long-term loan benchmark U.S. Treasury bonds fall from current levels, said Mike Reynolds, vice president of investment strategy. at Glenmede Trust Co. in Philadelphia.

At just under 7 percent, average rates on 30-year home loans “are not so high” that they would slow the economy, he said. “We expect that as the Fed continues to move down this path of lower rates, interest rates will trend lower. This is unlikely to be a linear process.

He is confident that Trump will not impose too rapid changes at the Fed, whose chairman, Jerome Powell, was appointed by Trump during his first term. “But the COVID days of just printing more money” without increasing revenues “seem to be behind us.”

Reynolds hopes that reducing deficit spending will boost economic growth and ease pressure on interest rates and the borrowers who pay them.
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