Why Aren’t Land Loan Rates Dropping?
The Fed may be cutting rates, but mortgage and land loan rates are staying stubbornly elevated.
If you’ve been looking to secure a land loan in 2025, you’re likely wondering why land loan rates haven’t dropped yet—even after the Federal Reserve cut rates 100 basis points over the course of three consecutive meetings in 2024. The answer lies in the complex interplay between the monetary policy tools employed by the Fed and the broader bond market dynamics that influence the benchmarks for long-term borrowing costs.
The Disconnect Between Fed Policy and Market Rates
When the Fed lowers its policy rate, it directly influences the overnight rate between banks. These decisions indirectly influence short-term interest rates—the Fed doesn’t directly control long-term rates, which are more commonly the benchmarks for land loans. As financial instruments, such as mortgages, extend further in duration—say, from a monthly resetting variable rate loan to a 30-year fixed rate loan—they become more influenced by the expectations market participants have for future interest rates. For example, mortgage rates for land are often tied to the 10-year Treasury yield, which has been climbing steadily despite the Fed’s actions. When the Fed cut rates for the first time this cycle in September, the 10-year Treasury yield was around 3.65%. Counterintuitively, that same benchmark has risen more than 100 basis points since then, recently topping out around 4.80%. Understandably, that has created frustration and confusion for potential borrowers.
This divergence between the current Fed policy rate and longer-term interest rate expectations stems from several factors:
- Economic Resilience: Recent data, including robust job numbers and strong consumer spending, suggests the economy is weathering higher rates better than expected. Concerns around an imminent recession, which had vexed markets since the Fed began raising rates, and the expectation that the Fed would need to accelerate rate cuts to prevent an economic slowdown have so far proved premature. Higher growth potential is associated with higher long-term interest rates as the market’s expectations of the Fed policy path shift higher.
- Inflation Concerns: When the Fed began cutting rates in September, its members expressed confidence that the rate of inflation was trending back towards their policy target of 2%. In the subsequent months, that confidence was tested as certain components of the measure remained “sticky” at uncomfortably high levels. When inflation expectations remain elevated, bond investors demand higher yields as compensation for potential future inflation risks. It also limits the ability of the Fed to continue cutting rates. Mid-January’s CPI release was a welcomed reprieve, but there is still more progress to be made.
- Fiscal and Policy Uncertainty: As with any other asset, supply and demand influences prices. As interest rates have risen and budget deficits have widened, the total debt outstanding and the cost of interest payments on that debt has grown. Markets have become more focused on the potential negative impact of this increase in supply—prompting the return of monikers like “bond vigilantes.” Uncertainty surrounding fiscal policies and potential trade disruptions under the new administration fueled higher term premiums on bonds. In other words, investors demand higher yields for holding longer duration assets of similar credit risk to compensate for the uncertainty.
Implications of Land Loan Rates for Borrowers in 2025
Altogether, these three factors have led investors to conclude that the path of Fed policy rates will be shallower and slower than what was expected when the process began with a “jumbo” 50 basis point cut last year. While the starting point on the curve, the Fed policy rate, is indeed lower, the ending point has moved in the opposite direction. Since long-term rates reflect the balance of expectations over the full period, these shifting expectations push those benchmark rates higher, impacting the market rates for land loans. The steepening yield curve, reflecting higher spreads between short- and long-term rates, compounds the issue for long-term loans like those for agricultural land.
Borrowers should consider this environment carefully, planning for elevated rates in the near term. It’s a reminder that while the Fed sets the tone, the bond market ultimately determines borrowing costs for many sectors, including agriculture.
Bottom Line: Land loan rates remain high because long-term rates are driven by factors like inflation expectations, economic strength, and fiscal uncertainty—forces that dictate the bond market’s response to each Fed rate cut. Borrowers should anticipate land loan rates to remain elevated in 2025 and understand that greater uncertainty means a wider range of potential outcomes for rates—both higher and lower. Rather than focusing on the current Fed policy rate, borrowers should look to the Treasury market for a reference point on land loans.
Don’t wait on rates. AgAmerica can help you find the best available land loan rate today, mitigate the risk of higher rates, and maintain optionality if rates decline later.
