October Mortgage Outlook: Lower Rates Could Deliver a Treat

Mortgage rates are likely to fall in October, even as the government shutdown will make it hard to see where the economy is going and where it's been.

Presented with the humility of someone who doesn't always get these predictions right, here's why mortgage rates might fall in October.

But first, how else will mortgage shoppers be affected? In past government shutdowns, most mortgages have been available, including those backed by the Federal Housing Administration (FHA loans) and the Department of Veterans Affairs (VA loans). There were delays in some cases. USDA loans, backed by the Department of Agriculture, were unavailable.

A Fed rate cut is almost a sure thing

Financial markets seem sure that the Federal Reserve will reduce the federal funds rate at the end of its scheduled Oct. 28-29 meeting. On the morning of Oct. 1, the markets were registering a 100% chance of a rate cut, according to the CME FedWatch.

Mortgage rates are likely to slip lower as investors gain confidence that the Fed will reduce short-term rates once or twice before the end of the year.

'No preset course' of Fed actions

There's a bit of room for doubt about rate cuts. Fed officials, including Chair Jerome Powell and Vice Chair for Supervision Michelle Bowman, have said in recent speeches that the central bank's rate policy isn't on a preset course.

The Fed released an economic forecast on Sept. 17, the day it cut the federal funds rate by a quarter of a percentage point. In that forecast, 12 Fed officials predicted one or two rate cuts this year, and seven predicted no more rate cuts. The central bank is undecided about what to do next.

Danielle Hale, chief economist for Realtor.com, said in a Sept. 19 video statement that "the Fed's own economic projections suggest a slower path of cuts may be more likely."

Economic data is uncertain

The Fed cut the federal funds rate in September because the central bank is concerned about the slow pace of job creation. The rate reduction is intended to support job growth. But it could have the side effect of boosting inflation.

Before August, the Fed was more focused on controlling inflation. That's why it hadn't cut rates this year before September. But worse-than-expected employment data emerged in August and September. That prompted the Fed to switch from inflation-fighting mode to unemployment-fighting mode.

The next look at the job market had been scheduled for Oct. 3, when the September employment report was supposed to come out. But the Department of Labor says it won't release economic reports during a shutdown. In the absence of a jobs report, lenders won't have access to official employment information. Neither will the Fed.

Another important economic report is scheduled for Oct. 15, with the consumer price index for September. The Labor Department won't issue that one, either, if the government remains shut down.

What other forecasters predict

The Mortgage Bankers Association and mortgage securitizer Fannie Mae both expect a small decrease in mortgage rates in the final three months of the year. In Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.6% in the third quarter. Fannie Mae expects the average to drop to 6.4% in the fourth quarter, while the MBA expects it to slip to 6.5%.

What I predicted in September and what happened

For my September forecast, I predicted that rates would stay mostly unchanged until the Fed meeting in the middle of the month. I wrote that a rate cut would cause mortgage rates to stay the same or fall in the second half of the month.