Yahoo Finance Will Today’s Interest Rate Pause Help the Housing Market in 2024?
Coming as no surprise and for its last meeting of the year, the Federal Reserve paused its interest rate hikes for the third time this year, following 11 increases since March 22, saying that “inflation has eased over the past year but remains elevated.”
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Now, opinions vary as to whether this latest pause will finally help ease the pressure on the housing market in 2024.
The Fed said it would maintain its funds rate at a range of 5.25% to 5.5%, a 22-year high, after its most recent two-day Federal Open Market Committee (FOMC) meeting on Dec.12-13. It also signaled several rate cuts in 2024.
Suggesting a more dovish approach and potentially that hikes are over, the Fed said in the statement that “any additional policy firming” would be based on a combination of factors.
Speaking at a post-meeting press conference, Chair Jerome Powell, noted that high interest rates have been weighing down on mortgage rates, yet added that the Fed is prepared to tighten policy further if appropriate. Asked about the addition of the word “any,” Powell said that it was an acknowledgment that we “are at or near peak rates for this cycle,” yet adding that further tightening is not off the table.
“It’s far too early to declare victory,” he said.
Powell added that the Fed was moving carefully and as to when they will dial back, he said that while “it is clearly a topic” of discussion, there was no clear timing.
The decision follows the latest set of inflation data, which increased 0.1% in November and 3.1% over the last 12 months, following October’s 3.2%, according to the Consumer Price Index (CPI), released Dec. 12. And once again, shelter prices continued to be a major driver-increasing 6.5% in the last year, offsetting a decline in gas prices, which were down 6% in November.
In the past few months, a combination of high prices, low inventory — partly due to homeowners who’d rather stay put due to the low mortgages they secured a few years ago — and exploding mortgage rates have rendered the road to homeownership almost impossible for many Americans.
Selma Hepp, chief economist, CoreLogic, said that the Fed’s decision today marks two important milestones — the first being the confirmation that it believes its actions helped tame inflation while also preventing the economy from slipping into recession.
The second is that housing can begin the slow process of returning to a more normalized rate environment, she said.
“However, we expect it will be several months before housing returns to smoother sailing and there may yet be some choppy waters ahead,” she noted.
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A Slow Unfreeze of the Housing Market
Some experts noted that the short-term impacts of a Fed rate pause will be stimulative for the housing market in 2024 as investors and consumers grow more confident that inflation pressures are continuing to ease and as they start to see signs that mortgage rates will begin to fall from current levels.
Todd Cole, head of private wealth and Senior portfolio manager at Ategenos Capital, said that the pause combined with the increasing possibilities of rate cuts next year should support demand from both homebuyers and home sellers.
Yet, according to Cole, many home sellers will continue to sit on the sidelines until it is clear that rates are on a path to decline further.
“If the Fed begins cutting rates in the Spring of next year, we expect that more home sellers will start to come off the sidelines,” he said. “They’ll be more inclined to enter the market as rates decline into the 6-6.5% range, knowing that the days of ultra-low interest rates in the 2-3% range will likely not return for a long time.”
And for those who want to sell but have been patiently waiting for rates to fall, a drop in mortgage rates below 7% might be enough of a catalyst for motivated sellers to make a move, he added.
Yet, he also expects a period of volatility as buyers and sellers seek to find equilibrium in their respective local markets. In turn, home prices may spike in certain markets while dropping in others.
Moody’s Analytics economist Matt Colyar echoed the sentiment, saying that Moody’s expects the first rate cuts to happen in June 2024.
“Financial markets have oscillated back and forth in recent months but are currently expecting a cut to occur sooner than we do — and they expect more of them in 2024,” he said, adding however, that Moody’s expectation is that the Fed’s cuts come slower, so mortgage rates will come down gradually as well.
“This means the current limited supply of homes for sale, largely the result of existing homeowners not wanting to give up their low, locked-in rate, will continue to support prices in the short run,” he added.
Looking ahead, he said that price growth is likely to be relatively flat but volatile as buyers and sellers work out a new equilibrium.
“How low does the 30-year fixed rate need to go for people locked in at 3% to list their home and initiate a pent-up ‘for sale’ wave? 5%? 4%?” he said.
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A Difference in Consumers’ Budgets
The continuation of the pause strongly suggests we are one step closer to an eventual reduction in interest rates, said Michele Raneri, vice president of U.S. research and consulting at TransUnion.
And in turn, she expects homeowners who are currently making payments on high interest mortgage loans to be among the first to take advantage of a reduction in rates as refinancing could immediately put “real money” into their pockets.
As she noted, since January 2021, there have been three million new mortgages originated with interest rates of 6% or higher, the total balance of which being more than $1 trillion.
And the monthly payments of each of these high interest mortgages average $2,201, she said. In turn, if interest rates dropped to even 5.5%, it could result in significant savings for these homeowners, as refinancing at that rate could result in an average monthly payment of $1,917 for them — a reduction of $284 every month.
“This would represent nearly $300 a month that these homeowners would be able to use elsewhere in this continued high cost-of-living environment in which every dollar counts,” she added.
A Cautious Optimism, but No Dramatic Progress
Other experts argued mortgage rates tend to track 10-year Treasury rates, so they’re influenced more by investor expectations and the state of the economy rather than directly by Fed actions.
“The Fed is important, of course, but mortgage rates aren’t as directly influenced by the Fed as something like credit cards,” said Ted Rossman, senior industry analyst, Creditcards.com.
“In fact, anticipating the Fed’s pause and likely rate cuts by the middle of 2024, 10-year Treasury rates have already come down substantially as well as mortgage rates.”
According to him, because mortgage rates tend to move before the Fed, we may have already seen the bulk of these potential cuts already reflected in mortgage rates.
“There’s room for them to come down further, of course, but it feels like a stretch to expect the average 30-year fixed to fall below 6% in 2024,” he said. “Bottom line: I think we’re starting to see slow progress on the housing front, but I wouldn’t expect dramatic moves.”
Danielle Hale, chief economist at Realtor.com also noted that despite improvement, mortgage rates remain high and while potential buyers bear the brunt of higher rates, many would-be sellers note the sharp difference between current rates and the all-time lows under 3% reached just three years ago.
Other Key Projections
The Fed also released its Summary of Economic Projections, which is its estimates for GDP growth, the unemployment rate, inflation and the appropriate policy interest rates.
In addition to the several rate cuts projected next year, the Fed revised downward its 2024 GDP projections, and it is now expected to increase by 1.4% — down from 1.5% in September.
And in terms of unemployment, it is projected to stand at 4.1%, in line with its September projections.
Finally, the projected inflation rate — which the Fed measures by the core personal consumption expenditures price index (PCE), edged slightly lower to 2.4%, from 2.5% in June.
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