This may slow the decline of mortgage rates — even if the Fed soon cuts interest rates

Wells Fargo Investment Institute anticipates that long-term mortgage rates, which have averaged around 7% for 30-year fixed loans, may not decline significantly even if the Federal Reserve cuts its benchmark rate in September. This outlook stems from their assessment that long-term rates are more closely tied to the U.S. 10-year Treasury yield, which they expect to remain biased higher, contrasting with short-term rates on adjustable-rate mortgages and home-equity lines of credit, which would likely see reductions from a Fed cut.

Analysis

Wells Fargo Investment Institute projects that long-term mortgage rates will not decline in lockstep with a potential Federal Reserve benchmark rate cut in September. While short-term rates on products like adjustable-rate mortgages and home-equity lines of credit are expected to decrease following a Fed cut, the outlook for long-term rates is more cautious. The analysis hinges on the view that 30-year fixed mortgage rates, which have hovered around 7% for the past two years, are more directly correlated with the U.S. 10-year Treasury yield. Wells Fargo contends this yield is "biased higher," suggesting that borrowing costs for homebuyers may remain elevated, thereby tempering expectations for a near-term housing affordability boost from monetary policy easing.

Key Decisions for Investors

• Investors should moderate expectations for a near-term rally in interest-rate-sensitive sectors like homebuilders and mortgage REITs, as the primary catalyst of lower long-term mortgage rates may not materialize as strongly as anticipated post-Fed cut.
• Focus on the U.S. 10-year Treasury yield as the key leading indicator for long-term mortgage rates and housing market activity, rather than solely on the Fed's federal funds rate announcements.
• Consider the divergent impact on lenders; institutions with significant exposure to adjustable-rate loans could face margin pressure, while the profitability of new long-term mortgage origination may remain more stable if Treasury yields stay elevated.