The Fed Rate Cut Explained: Why Mortgage Rates Could Still Drop in 2026

Mike Mills00:00:00

Hey, what's up, everybody? Welcome to the Texas Real Estate and Finance Podcast. I'm your host, Mike Mills, a local North Texas mortgage banker with Service First Mortgage.Now, here's the thing. You're listening to my voice right now, but I'm not actually recording this.This is AI generated audio using my cloned voice, reading a script I wrote. Pretty wild, right? Welcome to 2025, where I can create podcast content while I'm helping my agents and clients with all their mortgage needs.Now, this is just a short commentary on the recent Fed rate cut. My market updates and guest interviews will still be the real Mike Mills you listen to.I just wanted to get this out this week and didn't have a ton of time to record. So here we are. Hope it's not too distracting.The research is mine, the analysis is mine, the dad jokes are definitely mine, but the actual speaking, that's AI doing a pretty solid impression of me. If I sound a little too perfect or I'm not tripping over my words like usual, that's your clue. So why am I telling you this?Because transparency matters. And also because if you're an agent who wants to create more content without spending hours in front of a microphone, this is how you do it.I'll tell you more about that at the end. Alright, let's talk about what happened last week with the Federal Reserve, because there's a lot of confusion out there right now.The Fed cut rates again for the third time this year. But if you've been sitting on the sidelines waiting for mortgage rates to drop before you buy a house, I've got some news that might surprise you.The Fed basically said we're slowing down on rate cuts. In the same breath, they announced the latest cut. They stated they expect only one more cut next year in 2026.So does that mean mortgage rates are stuck? Are we just screwed if we want to buy a house? Actually, no. And that's what I want to talk about today.There are three very real reasons why mortgage rates could keep dropping in 2026, even though the Fed is pumping the brakes.And if you understand what's actually happening behind the scenes, you might realize that right now is actually a pretty solid time to make your move. So let's dive in. All right, first thing first, let's get something straight that I think confuses a lot of people.The Federal Reserve does not control your mortgage rate at all. I know that sounds wrong, because every time the Fed makes a move, the headlines scream about what it means for mortgages.But here's the reality, and I've been saying this for months. The Fed sets something called the federal funds rate. That's the interest rate banks charge each other for overnight loans.When they cut this rate, it affects things like credit cards, car loans, your savings account interest, but your 30 year mortgage, that's tied to something completely different. Your mortgage rate is based on mortgage backed securities, or mbs. These are basically bonds that investors buy and sell on the open market.When investors want to buy mbs, prices go up and mortgage rates go down. When they don't want them, prices drop and rates go up. Simple supply and demand.So when the Fed makes moves that spook investors about future inflation, even if they're cutting rates, those investors demand higher returns on their bonds. Which means mortgage rates can go up even when the Fed is cutting. It's like putting a fax machine in a Tesla.Sure, you could try to make it work, but they're just not designed to work together. That's the Fed rate and mortgage rates. Still with me. Good, because this is where it gets interesting.So reason number one, why mortgage rates could keep dropping. Fannie Mae and Freddie Mac are quietly pushing rates down.While everyone was watching the Fed meeting last week, something way bigger was happening behind the scenes. Fannie and Freddie, those two giant government backed companies that basically run the mortgage market, have been on a massive buying spree.And I'm not talking about a small shopping trip. I'm talking about a massive expansion of their mortgage backed securities portfolios. Check out these numbers.In just five months, they increased their MBS holdings by over 25%. Their combined portfolios hit $234 billion by October. And analysts expect them to add another 100 billion next year. Why does this matter?Because when Fannie and Freddie buy MBSs, they're creating demand. Demand goes up, prices go up. MBS's prices go up, mortgage rates go down. This is the actual mechanism that lowers mortgage rates. Not Fed cuts.The Fed cuts their overnight rate, but Fannie and Freddie move the mortgage market. Think of it this way. The Fed is like the DJ at a party. They control the music, the short term rates.But Fannie and Freddie, they're the ones actually getting people onto the dance floor. They're moving mortgage rates and right now they're working overtime to stabilize the market and push rates lower. Here's the best part.This happens regardless of what the Fed does.So even if the Fed only cuts once more in 2026, like they're signaling, Fannie and Freddie could keep buying MBS's and push mortgage rates down anyway. That's reason number one. All right, reason number two, and this is the one that isn't getting enough attention.Jerome Powell's term as Fed chair expires in May of 2026. And President Trump, he's made it crystal clear he wants lower rates. Like really wants lower rates rates.He literally said last week, and I quote, I'd love to get the guy currently in there out right now, but people are holding me back. No smoke and mirrors there. He's not hiding how he feels about Powell. So who's going to replace him?The front runners are Kevin Hassett, that's Trump's current economic advisor. He's seen as the favorite.Kevin Warsh, former Fed governor that Trump interviewed before, and Chris Waller, current Fed governor, who was actually the first person to call for rate cuts way back in July. And here's what you need to know about all three of them. They've all been calling for more aggressive rate cuts. How?Hassett thinks rates should be a lot lower. Those are his words. And he wanted a 50 basis point cut in December. That's double what the Fed actually did.Waller's more worried about jobs than inflation. Warsh thinks the Fed is being way too pessimistic about where the economy's headed. So what does this mean?Any of these three would likely push for more rate cuts than Powell has been willing to do. Now look, I'm not saying the new Fed chair is going to slash rates back to pandemic levels. That ship has sailed and it's not coming back.But what I am saying is that the statement about only one more cut in 2026 that came out last week, that could change pretty dramatically once there is a new person running the show. The market right now is pricing in Powell's cautious stance.But once he's gone and a Trump appointed chair takes over, we could see a shift toward more dovish policy in the second half of 2026. That's reason number two. Reason number three, mortgage rates have already dropped and they're already reflecting the current reality.Right now the average 30 year fixed mortgage rate is sitting in the low 6% range. That's down from over 7% earlier this year, way down from the 8% peak we saw in October 2023.Rates actually dropped pretty significantly in the weeks leading up to the Fed meeting because markets were expecting the cut. Markets are forward looking. They price in what they think is going to happen before it actually happens.So the current rate already reflects the Fed's cautious stance, the market has already baked in fewer cuts ahead, which means, and this is important, if things play out better than expected, rates could drop even further. And if Fannie and Freddie keep buying aggressively, it.If inflation drops faster than predicted, if the new Fed chair is more dovish than expected, rates could keep falling. But here's the question nobody's asking.While you're sitting around waiting for rates to maybe drop another half a percent, what's happening to home prices? Let me run some actual numbers for you, because this is where it gets real. Say you're looking at a $400,000 home today.Current mortgage rates in the low sixes, you put down 5%. That's $20,000. Your loan amount is 380,000. Your monthly payment, just principal and interest, is around 2350amonth.Now, let's say you decide to wait a year. You're hoping rates drop to the high fives. Sounds smart, right? But while you're waiting, home prices appreciate 4%.That's pretty typical for most markets right now. So, same house, one year later. Home price is now 416,000. That's 4% appreciation. Your down payment is now 20,800. Your loan amount is 395,200.Your monthly payment at a lower rate is around 2320. Saved 30 bucks a month. That's it. But here's what you actually paid for that $30 a month savings.An extra $16,000 in purchase price, an extra 800 in down payment, and a full year of rent payments, let's say 1800amonth. That's $21,600 in rent. So you spent roughly $38,400 more to save 30 bucks a month on your mortgage payment.At $30 a month savings, it would take you 107 years to break even. This ain't rocket surgery, folks. The math just doesn't work. This is what nobody talks about when they say just wait for rates to drop.Now, I know a lot of you listening are here in Texas, so let me talk about our local market for a second. The Texas market isn't booming like the pandemic years, but it's not crashing either. It's just kind of stuck.And honestly, that's creating some opportunities if you know where to look. Here's what the data shows. Average Texas home value is 298,900. That's down just 2.6% from last year.The statewide median price is 345,000, actually up slightly from mid-2024. Median days on market 65 days, and the inventory turnover rate is only 18.6%. That means only about one in five homes on the market actually sell.So what's happening? People who locked in 3 or 4% rates during the pandemic, they're not moving unless they absolutely have to.So inventory is tight, but buyers are being way more selective than they were a few years ago. That's actually creating opportunity.During the pandemic, you had to bid 20,000 over asking and wave every contingency just to have a shot at a house. Now only 10.7% of homes are selling above list price. Sellers are actually negotiating. Concessions are on the table. Inspection contingencies are back.The power dynamic has shifted. You're not competing with 15 other buyers throwing cash around anymore. You can actually take your time, do your due diligence and negotiate.And sellers who need to move, they're motivated. So what should you actually do with all this information? Look, I'm not going to blow smoke and tell you rates are going back to 3%. They're not.That's not how this works. And anyone telling you otherwise is either lying or they're selling something. But here's what I am telling you.Number one, the machinery is in place for rates to keep dropping in 2026. Fannie and Freddie are actively buying MBSS to push rates down. A new Fed chair takes over in May, who will likely be more aggressive on cuts.And rates have already adjusted down to the low 6% range. Number two, waiting for the perfect rate is costing you real money. Home prices are appreciating 4 to 5% annually in most markets.Every month you wait, you're paying rent and watching prices go up. And as we just did, the math on waiting rarely works in your favor. Number three, you can always refinance later.If rates drop significantly in 2026, you can refinance. It's not that complicated. But you can't go back in time and buy that house at today's lower price.Lock in the house now, refinance the rate later if you. It makes sense. And number four, negotiating power is on your side right now. Seller concessions are available. Rate buy downs are an option.I can explain how those work. If you want to reach out, you're not competing with 10 other offers anymore. This window won't last forever. And here's the bottom line.The Fed cut rates, but signaled they're slowing down. That sounds like bad news on the surface, but when you dig into what's actually happening.Fannie and Freddie buying massive amounts of MBS's Powell leaving in May, rates already down to the low 6% range. The picture is actually more optimistic than the headlines suggest. Will rates go lower? Maybe, maybe not.Nobody knows for sure, and anyone who tells you they do is guessing. But what I do know is this. Home prices aren't waiting around for you to feel comfortable.They're going up while you're on the sidelines, hoping for a better rate. Current rates aren't perfect, but they're also not crazy. They're actually pretty normal by historical standards.And if you're buying at today's prices, with the option to refinance later if rates drop, that's a pretty solid position to be in. The perfect rate isn't coming back, but the right time to buy that might be now.Now, before I wrap up, remember at the beginning when I told you this was AI generated using my cloned voice? Here's why I think that's important to talk about.We're at this really interesting point in technology where you can create quality content without being chained to a microphone for hours. I wrote this script, did all the research, analyze the data. That's all me. But the actual recording.That's AI reading my script in my voice, this blog post, this podcast overview, the email I'm sending out. I can create all of this content efficiently because I'm using the right tools.And if you're an agent or a lender who's been thinking I should be creating more content, but I just don't have the time. This is how you do it. You don't need a podcast studio. You don't need to be camera ready. You just need to know what tools to use and how to use them.If you want to learn how to do this for your business, how to clone your voice, how to how to automate your database, marketing, how to create content that works while you're living your life, reach out to me. I'm happy to show you the workflow. It's not complicated, and you don't need to be a tech wizard to figure it out. Family's the reason I do what I do.I didn't dream of being a lender, but I know how to make this process feel human. And I also know how to use technology to scale that without sacrificing the personal touch.If you want to run your numbers and see what your options actually look like, or if you want to learn how to build systems like this for your own business, let's talk. No pressure, just straight answers. You can call or email me anytime until next time. Be good humans and just keep grinding.Because life is what you make it, so make it great.