Patience Pays Off: The Delayed Benefits of Fed Rate Cuts for Homeowners and Investors

Lisa Mailhot  |  August 28, 2024

Buyers

Patience Pays Off: The Delayed Benefits of Fed Rate Cuts for Homeowners and Investors

 

As the Federal Reserve gears up to reduce the fed funds rate, homeowners and prospective buyers might be hopeful about lower mortgage rates soon following. However, it's important to manage expectations. The relationship between the Fed’s policy rate and mortgage rates isn’t as straightforward as one might think.

One historical example from June 2004 to July 2006 shows that even with a 4.25% increase in the Fed’s rates, mortgage rates only saw a 0.30% rise. Conversely, during the Great Financial Crisis, the Fed slashed rates by more than 5.00%, yet mortgage rates only dropped by 1.02%.

Why Mortgage Rates Won't Immediately Drop

The primary takeaway? Mortgage rates don’t directly track the Fed’s movements. Instead, a better gauge is the yield on longer-term U.S. Treasuries, specifically the 10-year Treasury yield, which has a much stronger correlation with mortgage rates. A regression analysis over recent years shows a robust 86% correlation between the 10-year Treasury yield and mortgage rates, compared to a 66% correlation with the effective fed funds rate.

This means that while a Fed rate cut is generally a step toward lower mortgage rates, the timeline for such changes is uncertain and likely delayed. Homeowners looking to refinance should keep an eye on the 10-year Treasury yield rather than expecting an immediate drop following a Fed announcement.

Will Investors See an Economic Boost from Lower Rates?

Investors hoping for a quick economic boost from lower mortgage rates may also need to exercise patience. Many homeowners currently enjoy historically low mortgage rates, meaning there is little incentive to refinance. As of June 30, the effective interest rate on U.S. mortgage debt is 3.92%, compared to the average 30-year mortgage rate of 7.26%. This creates a negative refinancing incentive of -3.34%, near historic lows.

For a meaningful refinancing wave to occur, mortgage rates would need to fall significantly. Even if the Fed reduces rates by the expected 0.25% to 0.50%, the incentive for most homeowners to refinance will remain minimal, leaving the anticipated economic boost largely on hold.

Bottomline

While the Fed’s upcoming rate cuts signal potential future benefits for homeowners and investors, those benefits won’t materialize overnight. Keep an eye on longer-term Treasury yields for a clearer picture of when mortgage rates might start to decline significantly. If you're considering moving to a new home in Orange County, let's connect. Together, we can navigate these shifting market conditions and find the right opportunities for you.

 

 

Reference: Gunster, C. (2024). Homeowners, Investors Will Have To Wait For Interest Rate Cut Benefits. Forbes.

RECENT BLOG POSTS

Why Tiny Home Prices Are About to Surge—And What It Means for Orange County Buyers

New tariffs on Chinese imports are already causing sharp increases in tiny home and ADU prices. In high-cost regions like Orange County, this could significantly impac… Read more

The Hidden Risk in Buyer Love Letters (And How to Avoid It)

Buyer love letters might tug at heartstrings, but they can also tread dangerous legal ground. Learn the top three ways these letters could violate Fair Housing laws — … Read more

When Repairs Go Wrong: Can You Legally Withhold Rent in California?

Renters have more power than they think when it comes to repair issues in California. This blog breaks down your rights as a tenant, including when and how you can leg… Read more

Midwest Home Prices Surge Fastest in the Nation

The Midwest is on fire—and we’re not talking weather. Home prices in cities like Milwaukee and Detroit are soaring due to tight inventory and high demand. This blog di… Read more

Why Buyers Need Over $52K More Than Renters—and the Gap’s Growing

The income gap between renting and owning a home has surged to over $52,000 in 2025. While rent increases have slowed, home prices and mortgage rates remain high, maki… Read more

Gas Prices Drop, Inflation Slows—Here’s What That Could Mean for Your Mortgage

Inflation cooled in March thanks to falling gas prices, providing a temporary sigh of relief for mortgage markets. While rates aren't dropping just yet, lower pressure… Read more

Why Homebuyers Are Turning to Stocks for Their Down Payments

A new Redfin survey reveals that 1 in 5 homebuyers plan to sell stocks to fund their down payment. As market volatility shakes confidence, homeowners and renters alike… Read more

Why Strong Jobs Aren’t Sparking a Housing Comeback

Despite a strong March jobs report, new tariffs and rising economic uncertainty are casting a shadow over the housing market. Here’s how these national trends could pl… Read more

New MLS Rules Let Sellers Choose How to List

The National Association of Realtors® just introduced a new companion to its Clear Cooperation Policy: Multiple Listing Options for Sellers. This update offers sellers… Read more

We are excited to assist you in finding your perfect home

Let's find a time that suits you best to chat about your goals, show you how we work, and figure out how we can help you the most