Fed looks set to cut – and mortgage rates could be on the way down
Market watchers hoping for a Federal Reserve interest rate cut will have to wait a little longer after the central bank announced it was leaving its key rate unchanged yesterday – but expectations are continuing to strengthen that at least one rate drop is on its way before the end of the year.
The Fed said in the wake of its latest meeting (July 30-31) that it was holding the federal funds rate at its current level of 5.25% to 5.5%, opting to keep rates where they are as it continues to assess the economic landscape and weigh up the right time for its first cut.
Still, markets have remained overwhelmingly confident that a move to lower rates is on its way in September, and a recent drop in average 30-year fixed mortgage rates below 7% across the country has also spurred optimism on the housing affordability front.
A further dip in mortgage rates, and indications from the Fed that its own key rate is likely to fall further, would be welcome news for those pinning their hopes on a housing market resurgence down the line.
However, rates are unlikely to fall enough this year to ease a prominent quandary facing the US housing market – namely, the so-called “lock-in” effect keeping existing homeowners in their current homes, according to a top economist.
Odeta Kushi (pictured top), deputy chief economist at First American Financial Corporation, told Mortgage Professional America that trend, which is seeing scores of owners opt against making a move because of their more favorable current interest rates, isn’t likely to fade anytime soon. “I think interest rates falling will certainly help, but it’s not going to be enough to unlock the majority of existing homeowners,” she said.
“The bulk of those existing homeowners are still locked into rates below 6%. I don’t think anyone’s forecasting rates to sit below 6% this year.”
Bond traders are gearing up for a potential Fed rate cut in September, with some betting on a half-point reduction. George Goncalves (MUFG) and Michael Feroli (JPMorgan Chase) suggest more aggressive cuts may be warranted if economic conditions worsen.https://t.co/0HOkZavC7M
— Mortgage Professional America Magazine (@MPAMagazineUS) July 30, 2024
Have consumers become accustomed to high mortgage rates?
While rate drops almost certainly won’t be dramatic enough on their own to impel more homeowners to list their property and move elsewhere, another factor may have contributed to a recent increase in availability: owners slowly becoming accustomed to the current rate environment.
That’s a stark contrast to the alarm among many owners and would-be buyers at the onset of the Fed’s flurry of rate hikes in 2022 and 2023. “We’re sort of just getting used to the fact that we’re in a higher-mortgage-rate environment,” Kushi said. “And so if you find a home that you like, that you can afford, I think existing homeowners are more likely to move maybe than they were when rates first increased.
“I think existing homeowners have re-anchored their expectations to a higher-mortgage-rate environment and that could help make that decision to finally move if they need to.”
Kushi was speaking to MPA on Monday, two days before the Fed made its latest decision on rates. She signaled that a September rate cut remained a distinct possibility, even if she expected the Fed to hold its fire until then. “We’re seeing a slower labor market and of course inflation continues to make progress towards the Fed’s 2% target,” she said.
“And so with those two factors combined, I do think we’ll probably see a rate cut this year and mortgage rates will, I think, move down lower in anticipation of that rate cut.”
Pending home sales see improvement in June
A recent drop in mortgage rates may have helped bring about a jump in pending home sales across the US in June, the first time the existing-home market has seen an uptick in activity for three months.
The National Association of Realtors (NAR) said this week that its index of contract signings had increased by 4.8% compared with May, posting a better-than-expected performance after months of sluggish activity.
The main factor behind that improved performance? An increase in housing inventory, according to NAR chief economist Lawrence Yun. Still, in a note following the release of the latest data, Kushi noted that purchase mortgage applications had slipped in July after picking up the previous month. “Buyers are still feeling very cautious and affordability remains constrained,” she said.
“Mortgage rates remain in the high sixes and house prices continue to reach new heights nationally. The payment-to-paycheck calculation still doesn’t pencil out for a lot of buyers.”
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