The U.S. mortgage market is under unprecedented strain. That pause is due in large part to quickly rising interest rates, influenced by recent economic events such as Moody’s recent downgrade of U.S. debt. Matthew Graham, chief operating officer at Mortgage News Daily, was recently interviewed by CNBC to talk more about this exciting development. He focused on its impact on future home buyers and the housing market at large.
Now, the 30-year fixed mortgage rates have shot up to 6.99%, the highest level since April 11th. Similarly, 15-year fixed rates are now at 6.35%, the same time that mortgage and financial markets are seeing increased volatility. Each time Graham noted, lenders immediately raised their rates so soon after the announcement of the downgrade. This move reflects their very reactive approach to the dramatically shifting market conditions.
Since early May, the chances of holding interest rates steady have turned upside down. They flew from only 1% a month ago on May 1 to 31% in today’s evaluations. This adjustment matures misgivings about rate cuts down the line, which have decidedly moved up the queue to being improbable at least in the short-term.
Impact of Moody’s Downgrade
Moody’s recent downgrade sent shockwaves through the mortgage sector and there was a quick firestorm of reactions. This led to an increase in short-term and long-term interest rates. Graham highlighted the compounded effects of continued market instability.
“The average mortgage lender had to account not only for the market movement in Friday’s closing minutes (after Moody’s downgrade was released), but also for the additional weakness seen on Monday,” – Matthew Graham
The uncertain and volatile nature of this environment has led to fears that there could be even more lead time before further changes in monetary policy. As Atlanta Fed President Raphael Bostic remarked, “further instability in the Treasury market would add to uncertainty. Adding even more uncertainty would cause further delays in policy changes as the Fed seeks more clarity.”
Indeed, recent actions taken by the Federal Reserve have already caused a historic increase in mortgage rates. According to the Mortgage Bankers Association (MBA), these rates have leveled off slightly below the key 7% threshold in recent weeks. While this stabilization is good news, it offers little relief for would-be homebuyers and still exerts a heavy toll on affordability.
Fed’s Position and Future Projections
Alberto Musalem, President of the St. Louis Fed, characterized the Federal Reserve’s current monetary policy as “well-positioned.” Most interestingly, he takes a hawkish tone on future interest rate increases. This hawkish viewpoint holds true when looking at his average score of 5.8 on the FedTracker.
At the start of this year, bond market experts were estimating a 75% probability that an interest rate cut would take place in the first half of 2025. Yet, according to recent statistics shown, this chance has decreased drastically to only 2%. This transition further emphasizes how quickly evolving economic circumstances can recast predictions and hopes about federal monetary policy.
Currently, markets are betting on the first Fed interest rate cut coming in September. This turn is an indication that market players are increasingly convinced the central bank will pivot soon. With rising mortgage rates and increased borrowing costs, many prospective homebuyers could find themselves facing challenges as they navigate this evolving landscape.
Market Reactions and Future Considerations
The yield on the U.S. Treasury 10-year has gone parabolic in recent months. This change, which typically responds marginally to shifts in interest rates than yields further on the curve, contributes to the complicated nature of the connection between mortgage rates and broader economic measures. The spike was at least in part a reaction to Moody’s recent credit downgrade. This has created major secondary and crossover effects with the Fed Funds rate.
Since 2022, the markets have shifted into a high-correlation phase exacerbated by the Federal Reserve’s unprecedented aggressive interest rate hikes. As a result, policy changes in one space almost immediately affect the bottom line of other fiscal spaces. This interconnectedness brings up concerns about how future economic policies will affect both mortgage rates and market stability as a whole.