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What If Interest Rates Don’t Go Down?

What If Interest Rates Don’t Go Down?

With mortgage rates hovering at high levels, many Seattle homebuyers are eagerly waiting for relief. Recent news that the Federal Reserve has dropped interest rates by 0.50% and plans to continue cutting incrementally might seem like good news, but it’s important to understand that this doesn’t necessarily mean mortgage rates will follow suit—at least, not right away.

The Fed vs. Mortgage Rates: What’s the Difference?

When the Fed cuts interest rates, it primarily affects the cost of borrowing for banks, not directly for consumers. Mortgage rates are determined by a range of factors, including the economy and the level of risk that lenders perceive in giving out loans. Banks lend money to make a profit, but there’s always a risk that borrowers won’t repay their mortgages. When the economy is stable and lending is less risky, mortgage rates tend to drop. However, if the outlook is riskier, banks charge higher rates to offset potential losses.

Bonds and Mortgage Rates: The Real Connection

A key factor in mortgage rate changes is the bond market. Most people hold mortgages for about 10 years, so banks often use the 10-year treasury bond as a benchmark for determining mortgage rates. When bond yields rise, mortgage rates typically rise, too. Right now, the gap between bond yields and mortgage rates—the risk premium—is larger than usual. Currently, with the 10-year bond yield at around 4%, mortgage rates are sitting at about 6.5%, reflecting this widened risk premium.

Even though the Fed is cutting rates, mortgage rates are likely to remain relatively high until bond yields drop significantly. However, bond yields are not expected to fall much in the near future, meaning mortgage rates could stay elevated unless banks reduce the risk premium.

What If Rates Don’t Drop as Expected?

Many major financial institutions are predicting mortgage rates will land just under 6% by Q1 2025. That’s still higher than earlier forecasts, which anticipated rates closer to 5% by the end of 2025. This expectation has caused many potential buyers to sit on the sidelines, hoping for lower rates next spring. But what happens if rates don’t drop as much as predicted?

In that case, you could see more buyers returning to the market with extra savings, leading to upward pressure on home prices. If rates do drop to around 6%, we may see more inventory, but many current homeowners locked into sub-4% mortgages will likely hold out for rates closer to 5% before considering selling. This means inventory could remain limited, keeping competition and prices high.

Moving Forward

If you’re waiting for rates to drop before buying a home, it’s worth considering that mortgage rates may not decline significantly in the near future. While waiting could pay off, buying now might allow you to get ahead of potential price increases, especially in high-demand Seattle neighborhoods. With strategic planning, you can refinance if rates do drop later, but the Seattle housing market’s history of appreciation could still work in your favor even if rates stay elevated.

 


 

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Ryan Palardy