American real estate "ghost stories": The Federal Reserve is cutting interest rates, but mortgage rates are rising

With the Federal Reserve announcing a 25 basis point rate cut in December, the market generally expects borrowing costs to decrease. However, recent mortgage rates in the U.S. real estate market have risen instead of falling. What is going on?

The Relationship Between Long-Term Bond Yields and Mortgage Rates is Closer

Some analysts point out that the Fed's rate cut primarily affects short-term rates such as the federal funds rate, which in turn influences a range of borrowing costs including credit cards, auto loans, and adjustable-rate mortgages (ARMs).

However, most mortgage rates, especially fixed-rate loans, are more closely correlated with long-term bond yields. Currently, the yield on 10-year U.S. Treasury bonds is soaring, which is also pushing mortgage rates higher.

On the other hand, the Fed's rate cuts do not directly affect long-term bond yields. Therefore, while both short-term rates and long-term bond yields are influenced by the macroeconomic environment, they do not move in sync.

This disconnection may lead to a situation where, even if the Fed attempts to lower the overall borrowing costs in the economy, mortgage rates continue to rise.

Concerns Over Inflation and Economic Slowdown Push Up Bond Yields, Mortgage Rates Rise Instead of Fall

The rise in mortgage rates seems to be influenced by a "domino effect."

Analysts believe that mortgage rates are very sensitive to inflation expectations. If investors perceive the Fed's rate cuts as a sign of rising inflationary pressures, they may demand higher yields on long-term bonds to compensate for the loss of purchasing power.

Currently, the Fed also acknowledges that it cannot control inflation, with Powell even stating that it may take two years for inflation to return to the Fed's target level. However, this seems overly optimistic. Renowned economist Peter Schiff recently stated:

"Inflation will not be close to 2% in two years; it will be higher than it is now. Powell's views on inflation and the economy are still wrong... I believe we are facing stagflation, and the situation will worsen."

Analysts suggest that if bond investors view the rate cuts as a sign of a weakening economy, they may sell off bonds, pushing yields higher. This series of "domino effects" often leads to rising mortgage rates, which contradicts the Fed's intention to lower borrowing costs.

Additionally, some analysts point out that if investors believe the economic situation is deteriorating, they may demand a higher premium to bear long-term risks, passing this risk onto borrowers, which in turn leads to rising mortgage rates. Meanwhile, as the market anticipates rising inflation, they will also demand increasingly higher yields.

The Fed Seems to Be Trapped in a "Cycle," with a Potential Bubble Burst in 2025

Subsequently, as mortgages become more expensive, along with rising costs for homeowners' insurance, materials for home improvement projects, and other collective burdens of homeownership, prospective homebuyers are delaying their plans. This has pushed commercial real estate to the brink of bankruptcy, placing the Fed in a dual dilemma of needing to lower borrowing costs while also alleviating inflationary pressures Analysis suggests that the Federal Reserve cannot achieve both goals simultaneously. In the context of economic stagnation and high inflation, as the 10-year yield continues to soar near 5%, mortgage rates are expected to rise further, creating a "vicious cycle":

"2025 may be the year they face the consequences of their actions, as all bubbles eventually burst. The Federal Reserve is trapped in a cage of deteriorating economic conditions, soaring deficits, skyrocketing debt, and high inflation, unable to escape."