Analysts appear divided on the prospect of significantly lower rates by the end of the year
Mortgage borrowers have seen a degree of relief in recent weeks with rates finally dipping below 7%, a rare glimmer of good news in a market that continues to present plenty of challenges.
Freddie Mac said the average rate on a 30-year mortgage slid to 6.87% last week, down from 6.95% the week prior and marking the third consecutive week that rates have dropped.
That means borrowing costs are still higher than the same time last year, when average rates were perched at the 6.67% mark, but served as an important sign that better times could be ahead for homebuyers and owners.
The market’s fortunes have improved amid indications that inflation is trending in the right direction and the expectation that the Federal Reserve will cut its key interest rate before the end of the year.
Still, the Fed struck a hawkish tone in its last rate decision, which saw the central bank signal its expectation that it will cut rates just once before January.
For Lamont Harris, Jr. (pictured top), president and chief executive officer at Harris Capital Mortgage Group, that continuing caution by the Fed means mortgage market watchers should brace themselves for the likelihood of high rates continuing for the remainder of the year – although there’s also room for optimism looking ahead.
“I think with the environment that I’m looking at right now, I feel like the rates are going to continue to go up,” he told Mortgage Professional America. “Second, third quarter, I don’t see any trend to go in a different direction before we move towards Q4.
“The end of Q4 going into Q1 next year, we’ll probably see some adjustments, but those adjustments will be to the high rates that we had all endured for the summer. So with that, expect temporary relief into Q1 – but I think we’ve got a lot of good times ahead of us, so we’ve just got to stay the course.”
Homebuilder sentiment in the US is at its lowest since December 2023 due to stubbornly high mortgage rates and rising construction costs, according to the National Association of Home Builders (NAHB).https://t.co/rJqjBfdfzp
— Mortgage Professional America Magazine (@MPAMagazineUS) June 20, 2024
Fed officials appear split on rate forecast for remainder of 2024
The so-called “dot plot”, a quarterly chart offering insights into Fed officials’ thinking on the economic outlook, showed no consensus among decisionmakers on the likely path ahead where interest rates are concerned.
Still, a common refrain by Fed members has underlined their need to see further clarity on where inflation is headed before they begin to consider possible rate cuts.
“My personal view is let’s get more conviction before moving,” Federal Reserve Bank of Richmond president Thomas Barkin commented last week when quizzed on the prospect of a cut.
“There are times where we will want to give forward guidance and have given forward guidance. This doesn’t feel like one of those times to me. It doesn’t feel like a forward guidance time.”
Barkin’s remarks arrived with latest government data showing consumer prices excluding food and energy costs, a core measure closely watched by the Fed, rose just 0.2% between April and May.
On a year-over-year basis, core prices were up 3.4%, a slowdown from 3.6% in April, in a further sign that inflation is trending at least slowly in the right direction.
What’s the outlook for the US housing market?
Meanwhile, further signs of a cooling economy emerged as construction of new homes plunged to its lowest level in almost four years, with first-time applications for US unemployment falling slightly.
Comerica’s chief economist Bill Adams told Reuters that the trend suggested the Fed could actually bring rates lower more than once by the end of 2024.
“Economic indicators for the second quarter largely point to another slow quarter of economic activity,” he said. “Soft activity and labor market data reinforce expectations for the Fed to begin cutting interest rates in a few months… an initial cut in September, and a second cut in December.”
That said, the likelihood of rates remaining elevated for the rest of the year was a key reason behind the decision of Fannie Mae’s Economic and Strategic Research (ESR) Group to downgrade its home sales forecast for 2024.
Chief economist Doug Duncan said affordability challenges would likely persist for homebuyers throughout the rest of the year.
“Unfortunately, we’re still not forecasting a ramp-up in housing activity, which will require some combination of continued household income growth, a further slowing of home price appreciation, or a decline in mortgage rates to bring affordability within range of many waiting for first-time and move-up homebuyers,” he said.
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