In short: The Fed held interest rates as expected, at 4.25% to 4.5%, with the open question of how long this pause would continue. As economic data and the Fed respond to the new administration’s policy announcements, the mortgage market may experience continued volatility.
The Federal Reserve did not lower its target rate during the Federal Open Market Committee (FOMC) meeting on January 29. This pause in the Fed’s rate-cutting cycle was widely anticipated.
The timing of the next cut is up in the air after Chairman Jerome Powell peppered his press conference commentary with phrases like “wait and see,” “patience,” and “no hurry.” He also highlighted the elevated uncertainty surrounding the new administration’s policies on tariffs, immigration, regulations, and fiscal budgets.
The next rate cut requires further progress on inflation. The shelter components of inflation indices have been notoriously elevated and sticky, given how long it takes for slower growth of market-rate rents to show up in the CPI. The Zillow Observed Rent Index (ZORI) is a leading indicator of housing inflation — it is still widely expected that shelter inflation will slowly fall toward Zillow measures of rent growth.
Though mortgage rates barely changed after today’s Fed announcement, expect them to bounce up and down in the future. If government policies raise inflation and take future rate cuts completely off the table, mortgage rates could rise. Alternatively, if fiscal deficits become leaner than expected, or if businesses reduce labor in response to rising input costs, mortgage rates can fall. Given the range of potential outcomes and the lack of clarity, market narratives may cause mortgage rates to fluctuate weekly.
Elevated mortgage rates limit what households can afford. Potential buyers preparing for the home shopping season should anticipate volatility in mortgage rates that could change which homes are affordable to them on a daily basis.
On the bright side, with inventory continuing to grow, home prices are only expected to rise modestly in the coming year, which alleviates one headwind for affordability. Though elevated mortgage rates had previously deterred some potential sellers from listing their homes, the realization that rates will be higher for longer has helped push 1 in 5 homeowners to consider selling in the next three years, according to this Zillow survey.