After mortgage rates hit their lowest levels in more than a year last week, applications to refinance surged 35% compared to the previous week. The Mortgage Bankers Association Refinance Index is up 118% from a year ago.

The average 30-year fixed mortgage rate has gone from under 3% in 2021 to nearly 8% in October 2023, driven by movement from the Federal Reserve’s federal funds rate, the interest rate banks are charged for overnight lending.

Mortgage rates fell last week to 6.47% in anticipation that the Fed will lower rates after a weak jobs report for July. Following more softening in inflation in July’s consumer price index, the measure is 2.9% annual inflation, edging closer to the Fed’s 2% target, experts are pinning more certainty on a September rate cut.

Straight Arrow News interviewed Federal Reserve expert Kathleen Hays following the inflation release and got her thoughts on how it could impact the housing market. Hays is the editor-in-chief of Central Bank Central.

Below is an excerpt, edited for length and clarity. Watch the exchange in the video above.

Simone Del Rosario: We’ve seen mortgage rates go down to levels lower than they’ve been in more than a year. This is done in anticipation that the Fed is going to be cutting rates. So when the Fed does cut its rate, how are people going to be affected? Are rates going to come down even more? Has the air already been taken out of the tires because they’re expecting the cut? What’s happening there?

Kathleen Hays: Well, of course, we had the big bond market rally so that’s pushed deals down a lot. And that was one of the things, of course, that intensified after we got the Fed decision and then the unemployment rate going up, making people that much more worried about it.

Of course, that’s the direct link between mortgage rates and the bond market, right? The 10-year-note yield, when it goes down, you’re going to see mortgage rates come down too.

On a human level, doesn’t anybody know somebody who’s trying to find a house and they can’t because people still don’t want to move out of their low-mortgage-rate mortgages? They don’t want to sell their house yet. Doesn’t anybody want to sell their own house and they figure, well, I don’t know, the mortgage rates are so high, maybe I’ll wait.

Part of the issue with the how much home prices will come down is the fact that inventories are low. And when the Fed cut rates so much during the pandemic, there was a huge bout of home buying, and that’s another reason why, even with somewhat lower [mortgage] rates now, the home sales are not up that much yet. But I think it’s a very important factor right now.

Now, if someone could get a 5.5% mortgage, they would snatch it up, right? And when it got so low, ‘Oh God, if I had to pay 3.75%,’ you know? So it’s a very powerful thing that could happen.

As the Fed starts cutting rates, presumably yes, bond market will rally, you’ll get yields coming down more, and that’s going to fade through and be a very important factor. So that’s kind of in abeyance right now, but it’s a little bit complicated, and home prices are much higher than they were.

Home affordability is so much worse than it was, partly because of what happened back during the pandemic, but it’s something to look forward to. And in terms of the housing industry, [there are a] lot of calls for, ‘We need more homes now.’

That’s the thing. We need more construction. Well, if I’m a contractor, if I’m a developer, if I’m a builder, if I can see mortgage rates coming down, presumably that would encourage me that that’s going to heat up the market, and it’s going to make more sense for me to do that.