Housing Market Update: The Fed Raised Rates, So Why Did Mortgage Rates Drop?

The Fed raised interest rates last week for the first time since July 2023. The very next day, mortgage rates went down. Not up. Down. A lot of people were confused by that, so I want to walk you through what really happened, what it means for your mortgage, and which housing markets are hot and cold right now.

The Fed raised rates and mortgage rates went down. Why?

Here is what the Fed did. It raised its target rate by a quarter point to a range of 3.75% to 4.00%. The vote was 12 to 0. Nobody on the committee said no. The next meeting is October 27 and 28, and I will not be shocked if we see another hike.

The bigger news is what the Fed said about the future. It erased every single rate cut it had planned for 2027. Kevin Warsh now runs the Fed, and he does it very differently than Jerome Powell did. Powell gave us tons of forward guidance. Warsh does not. So there is no Fed promise to lean on for October.

So why did mortgage rates drop the day after? Because markets price the future, not today. Traders were already almost sure the hike was coming. By the time the Fed acts, the bond market has usually already moved. And sometimes bond investors like seeing the Fed fight inflation hard. It gives them hope that things get better down the road.

Do not get excited, though. I think that drop is temporary. The 30 year fixed rate hit 6.95% in the Freddie Mac survey for the week of September 17. That is the highest since January 2025, and it jumped 19 basis points in one week. Back in February it touched 5.98%. We are up almost a full point since then.

What the Fed controls and what it does not

Everybody thinks the Fed sets mortgage rates. It does not. The Fed sets one number: the overnight rate that banks charge each other. That number drives credit cards, auto loans, home equity lines and savings account yields.

It does not set the 30 year mortgage. What moves the 30 year is the 10 year Treasury yield. That yield went from about 4.77% at the start of September to about 5.01% on Friday. That is what pushed your mortgage rate up this month.

How to estimate the 30 year mortgage rate yourself

This is the most useful thing I can teach you in this whole article. Take the 10 year Treasury yield and add about 200 basis points, which is 2%. That gives you a rough 30 year mortgage rate.

Right now the 10 year is near 5%. Add 2% and you get about 7%. That is right where mortgages are.

That 2% gap is what lenders add on top. Since the last recession it has averaged closer to 1.7%, so the gap is wider than normal today. It could shrink a little. It could also grow. It got to about 3% in 2023.

Want a 5% mortgage again? At today’s gap, the 10 year Treasury would have to fall to about 3.3%. Could it happen? Sure. But that would be a very different economy than the one we have now. I do not see it for a while.

What a quarter point costs you

People always ask me what a Fed hike costs them. By my math, a quarter point adds roughly $65 a month to the average new mortgage payment. Multiply that by 12 and it adds up fast.

Here is the affordability problem in plain numbers. The average new loan is about $389,367. To afford the typical US home under the standard rule, a family needs to earn about $109,796 a year. The median household earns $87,599. That is a gap of about $22,000.

There is one bit of good news. That gap has narrowed three years in a row. Two years ago it was $28,834. It is getting better. It is just not there yet.

I am stuck too, by the way. I have a property with a mortgage around 3.2%. If I move, I pay almost 7%. So I stay put. Nearly 79% of American homeowners have a mortgage under 6%. Why would they leave?

Is the housing market crashing?

I hear it all the time. “Moe, the housing market is going to crash.” I do not think so, and the data does not show it.

I looked at five separate home price measures: Case Shiller, the FHFA index, ICE, Zillow and the National Association of Realtors. Every one of them shows prices up between 1.3% and 2.1% over the past year. Five sources, one answer. No national crash.

But not all markets are the same. 54 of the 300 largest markets are now falling. In my book, a 10% drop is a correction and a 20% drop is a crash. Austin is down 27.6% from its 2022 peak. That is a crash in that city. The thing to notice is that the list of falling markets is getting shorter. It was 77 in the spring.

The hottest housing markets right now

• Milwaukee: typical home value about $391,000, up 5.5%. It is also one of only five seller markets left.
• New York: about $739,000, up 5.2%, with the second lowest share of price cuts in the country.
• Hartford: about $404,000, up 5.2%, with the lowest share of price cuts in America.
• Chicago and Cleveland round out the top five.
• San Francisco: about $1.1 million, up 3.3%. This is the one everybody wrote off in 2023.

Not one of the top eight is in the Sun Belt. Why? These cities never built, so they never flooded. The Sun Belt built a huge number of homes from 2021 through 2024. The Northeast and Midwest mostly did not. So there is no extra supply to work through, and sellers still have some leverage.

San Francisco is the exception. It is the only West Coast city on the hot list, and the driver there is the AI jobs boom, not a supply shortage.

I have seen this firsthand. I own property in an area with a lot of new building, and it has barely moved in years. I also had property in an area with zero building, and it went up something like 60% to 70%. A pretty, growing area with homes going up everywhere does not always mean your value goes up. All that building can lead to price cuts.

The coldest housing markets right now

• Austin: typical home value about $419,900, down 4.2%. That is the largest drop of any major US metro.
• Las Vegas: down 2.8%.
• Dallas: down 1.9%.
• Houston: down 1.8%, and the third biggest buyer market in the country.
• San Antonio: down 1.8%.
• Seattle: down 1.6%, the worst city on the Case Shiller 20.
• Raleigh: down 1.6%.
• Atlanta: down 1.5%, where nearly 73% of sales include a concession.
• Denver: down 1.5%, with the highest share of price cuts in the country.
• Orlando: down 1.4%.

Florida is not in free fall anymore. Tampa is down only 0.6%, Orlando is down 1.4%, Jacksonville is flat, and Miami is up 0.5%. Active listings across Florida are down about 12% from a year ago, and less inventory helps prices steady out.

Florida condos are a different story, and it is ugly. Condo prices are down 34% in Cape Coral, 32% in Oakland, 30% in St. Petersburg, 28% in Austin, 22% in Tampa and 21% in Jacksonville. Six markets are back to 2006 prices.

Only five seller markets are left

A seller market is where the owner has the power. Multiple bids. Offers over asking. Across the country there are now 57.9% more sellers than buyers. The only seller markets left are Nassau County in New York, Newark, Montgomery County in Pennsylvania, Milwaukee and San Francisco. That is the whole list.

44.7% of sales included a concession from the seller. That is the highest August share on record. The biggest buyer markets are Nashville, with 139% more sellers than buyers, then Miami, Houston, Orlando and Las Vegas.

Here is the part most people get wrong. Inventory is not flooding the market. Active listings are still about 7.7% below August 2019. Listings are up only 3.6% from a year ago. A year ago that number was 20.8%. People are locked into low rates and cannot leave. So what is creating these buyer markets is falling demand, not rising supply.

Home builders are the broken part of this market

The builder sentiment index fell three points to 32 in September. Anything above 50 is good. The buyer traffic part of that index is at 23. That is horrible.

• 38% of builders cut prices in September, up from 35%.
• The average cut has been about 6% for six straight months.
• 66% of builders are using incentives, like buying down your rate or throwing in upgrades.
• New homes have 9.6 months of supply. Existing homes have only 4.9.

If you can wait, waiting may work in your favor.

The truth about those 3.92% builder mortgages

Builders advertised an average mortgage rate of about 3.92% in August while the open market sat near 7%. That rate is not free and it is not magic. You are paying for it.

Buying a rate down one full point costs roughly 3% of the sales price. Going from about 6.7% down to 3.9% is close to three points. That works out to about 8% to 9% of the price of the house. So the question to ask is simple. Are you paying a premium on the house just to get a lower payment? You might do better taking the market rate and asking for that money off the price.

Foreclosures are about insurance and taxes, not prices

There were 228,000 foreclosure filings in the first half of the year, up 21%. But this is not a story about home prices falling. It is about the cost of keeping a home. Insurance now runs about $209 a month, up 8.7% from a year ago, and it is now 9.6% of the total mortgage payment. The average property tax bill is about $4,427, up 3% and the highest since 2020.

This one gets me fired up. I was homeless at one point in my life, and it was the worst feeling I have ever had. I do not think seniors, people with disabilities, or anyone who gets sick should be at risk of losing a home they own over a tax bill. There are other ways to fund local government. That is my opinion, and you can tell me yours.

Where do home prices go from here?

The big forecasters do not agree. Fannie Mae sees prices up about 1% in 2027. The Mortgage Bankers Association sees prices down 6% in 2027. Zillow says flat over the next 12 months. Those are all top tier shops, and they are pointing in opposite directions. The best case I can find from anyone in the industry is 1% up. I do not love that.

Here is what I am watching:

• The 10 year Treasury yield, now near 5.01%. The higher it goes, the higher mortgages go.
• The August PCE inflation report on September 30. Core PCE is running at 3.4%.
• The next Fed meeting on October 27 and 28.

Just because rates are near 7% does not mean they cannot go higher. The Fed can keep raising and make this even harder on all of us. Plan for that.

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Sources

• Federal Reserve FOMC statement and Summary of Economic Projections, September 16, 2026
• Freddie Mac Primary Mortgage Market Survey, September 17, 2026
• US Treasury daily yield curve, September 18, 2026
• Zillow Home Value Index, August 2026 data
• S&P Cotality Case Shiller, FHFA House Price Index, ICE Mortgage Monitor
• National Association of Realtors existing home sales, August 2026
• Redfin buyers versus sellers analysis, August 2026
• Realtor.com August 2026 housing report
• NAHB Wells Fargo Housing Market Index, September 16, 2026
• Census Bureau new residential sales and construction
• ATTOM foreclosure and property tax data, Pew Research
• Fannie Mae, Mortgage Bankers Association and Zillow forecasts

I am not a financial advisor and nothing in this article is financial advice. Everything here is my own opinion, for educational and entertainment purposes only. Do your own research and talk to a licensed professional before you make any financial decision.