The Fed Cut Rates — So Why Did Mortgage Rates Go Up and the Dow Drop 1,100 Points?

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A cut from the Fed — and everything got worse

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and today we're talking all about the Federal Reserve. They did come out and cut interest rates by a quarter — but now we're seeing massive changes. Mortgage rates are going through the roof: we've already had a worsening-prices rate sheet today, and we'll probably have higher rates again tomorrow. The Dow has dropped by 1,100 points. So we're going to start with the Fed's own announcement, then get into why the Dow is dropping and why mortgage rates are getting worse even though the Federal Reserve rate just went down.

The Fed's December statement

This was released at 2 p.m. Eastern today. It says: recent indicators suggest economic activity has continued to expand at a solid pace. Labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the committee's 2% objective but remains somewhat elevated. The committee judges the risks to its employment and inflation goals are roughly in balance; the outlook is uncertain. In support of its goals, the committee decided to lower the target range for the federal funds rate by a quarter percentage point, to 4¼ to 4½ percent. In considering additional adjustments, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The committee will continue reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities.

Basically, what they're saying is: things are not looking great. I watched a lot of the press conference afterward, and my read on the 2025 outlook was that it was weak. Earlier this year they were telling us how many cuts to expect in 2025, and they made them sound significant. Today they wouldn't commit — not ruling more cuts out, but giving us nothing to hold onto. Vague, and to me, very disappointing.

Notice that line about mortgage-backed securities: when the Fed keeps selling MBS off its books, there just isn't the same appetite in that bond market — and that is not good news for mortgages.

What the Fed funds rate touches — and what it doesn't

The federal funds rate is directly connected to credit cards, home equity lines of credit, student loans, car loans — short-term borrowing. With three cuts now behind us, you'll see those rates slowly move down. But home mortgage rates are not tied to the Federal Reserve rate. We're tied to mortgage-backed securities, notes, bonds, treasuries — to where investors are putting their money. When money moves into bonds and longer-term, safer investments, mortgage rates improve. When it pours into stocks, rates climb. That's the general rule — not exactly how it works, but a good way to hold it. Since the election the stock market had been doing great, and our rates had been creeping up alongside it.

The Dow's historic slide

Now to what's happening in the market, and I'll credit CNBC fully for this reporting. The Dow Jones Industrial Average sank deeper into the history books on Wednesday, posting its 10th straight losing day as a disappointing rate outlook from the Fed rocked the market. The Dow lost 1,123 points — 2.58% — to 42,326.87, its biggest loss since August and its worst losing streak since an 11-day slide in 1974. The streak began the session after the Dow closed above 45,000 for the first time ever on December 4, and the losses total about 6%.

And here's the context: we're at roughly the 11th day of mortgage rates climbing too. Our rate sheets move on anticipation — you've heard me use that word for years. The market had been anticipating exactly this small, insignificant quarter-point cut, so it was already built in. What wasn't built in: the Fed indicated it would only cut twice in 2025, down from the four cuts in its last forecast. Fed Chair Jerome Powell said the cuts already made allow the Fed to be “more cautious.” Treasury yields jumped on that cautious outlook — the 10-year crossed above 4.5% — and, as DoubleLine's CEO put it on CNBC's Closing Bell, the takeaway was that there's not going to be an aggressive cutting cycle, and the market is pretty much in sync with that.

Here's what makes no sense to me after roughly 30 years in this industry: typically when stocks fall, our rate sheets improve, because money rotates out of aggressive positions into safer, longer-term investments like mortgage-backed securities. That is not happening right now. Stocks are down and rates are getting worse at the same time. It's a very weird moment, and nobody — not even a very good economist — can tell you exactly how it plays out.

Where I break with the Fed

The Fed's projections see unemployment staying low. I'm going to call BS on that. I don't think we'll see lower unemployment in 2025 — I think the unemployment numbers we've been getting haven't been accurate and will need to be revised. And if unemployment starts showing real cracks, everything said today can turn around very quickly. They come out, they make a statement, fear and excitement move the market immediately — then the real numbers arrive and it's a whole different animal. That's why prediction is so hard.

The statement also suggested the Fed thinks its rate is “no longer clearly restrictive,” so it's a logical time to pause. In my opinion we are still restrictive, and two cuts in 2025 will not be enough. I can absolutely see why investors were concerned after this meeting.

Q&A: stocks, rates, and house prices

Michelle asks: “Stocks went down, interest rates down, but consumer and house prices didn't come down — am I right?”

Let's line it up. As of today: stocks down, yes. The Federal Reserve rate down a quarter, yes. Mortgage rates — up. And no, house prices have truly not come down. We've seen softening: homes staying on the market a little longer, buyers getting closing-cost credits where it used to be nearly impossible to get any credit at all, and sellers having to come back to reality. It used to be you could list above the last sale in your tract and probably get it; now those listings sit until the price comes down to the last comparable sale — and then they move. But inventory is still very low, so sellers holding out for their price are still mostly winning. And keep the year-over-year view: rates today are definitely lower than December 2023. We keep getting peaks and valleys; today is a peak.

Michelle also asks: “Is it true that mortgage rates don't really come down when Fed rates are down?” Exactly true — the things directly connected to the Fed rate are your credit cards, your HELOC, the rate on a new car loan or student loan. Mortgage rates are part of the mortgage-backed securities market, and with the Fed continuing to sell MBS off its balance sheet — bulk selling at discounted prices — it's not helping our rates at all. If they went into a big buying cycle instead, that would help.

My 2025 forecast — opinion, clearly labeled

Nobody can tell you what's going to happen next year — and if you watch anyone on any platform who claims they can, take what they say, take what someone else says, and land in the middle. But here's my track record and my call: back in 2022 and 2023 I said we wouldn't see the first rate cuts until the end of the third quarter or beginning of the fourth — go back to my old videos — and that's exactly what happened. I don't believe we'll see only two cuts in 2025. I think we more than likely see three to four, once the data forces their hand. And I believe that in December 2025, rates will be lower than they are today, December 2024. That is my personal opinion — do not hang your hat on it.

Meanwhile: people are not going to lose their homes right now. They've got tons of equity, great interest rates, and monthly payments cheaper than rent. If you need to buy — growing family, empty nest, whatever it is — you cannot really time this market. There are ways to buy the rate down for the first couple of years while this craziness plays out, and then refinance at a lower rate later. We've never been here before — nobody alive has operated through the aftermath of COVID-era zero rates — so get things done based on need, get comfortable, and improve from there as rates come down.

Q&A: will home prices drop as rates drop?

Ynot asks: “Will home prices drop as interest rates drop?”

I'd actually say no. Right now is the softest point of the market — November through February is always slow; people don't want to move during the holidays. Here's my number: I believe if we see rates get into the high fives — 5.875% — we're going to see a lot more movement. More listings, more sales, more first-time buyers, more people trading up, more people renting one home out to buy the next. And I don't think inventory can handle everyone who jumps in at that point. So as rates come down, I expect home appreciation to pick up, not prices to drop. Which means your best window is now through the next couple of months: a chance at a price reduction or closing-cost credits from the seller, which we can use to dramatically lower your rate and payment.

Q&A: can a locked rate move to another property?

John asks: “I locked in a rate at 6.5% for a property. Can I pay for this property in cash and apply this rate to a different property?”

That answer is no, in both directions the question could go. If you have an existing mortgage note at 6.5% tied to a property, selling that property pays the note off — it can't be transferred. And if you're under contract with a locked rate, the lock is tied to the borrower and the property address — that transaction — not just to you and your social. Start a loan on a new address and you're starting over, re-locking at whatever the market gives you. If you've got the cash and your locked rate beats today's quotes, consider closing the financed loan at the locked rate and paying cash for the other property.

Wrap-up: last show of 2024

This is my last show of the year — I'll be back the first Wednesday after the first. If you want to know when I go live, text the word LIVE to 844-935-3634 — that's 844-WE-LEND-4, and it's also the office number if you'd like to talk anything through one-on-one. You can also reach me through the contact button at mortgagemomradio.com. A big shout-out to Vera Nelson, whose commercial ran throughout today's show — she and her team in Pasadena cover a huge stretch of Southern California, from Bakersfield to San Bernardino to Victorville, and I've watched them do a great job for years. Merry Christmas, happy holidays, happy New Year — goodbye 2024, and fingers crossed we see some greatness with rates in 2025. Talk to you all real soon.