Normally, we discuss the news in chronological order. But the Fed’s commentary on Wednesday, and the ecstatic market reaction, was too important to not discuss first. The early Christmas presents keep coming for the real estate market. And this was a big one.
Rate cuts coming right on the dot
The Federal Reserve kept its short-term policy rate steady for the 3rd-straight meeting. Nobody really expected a rate hike (or a rate cut), so no surprises there. The official press release didn’t say anything new.
What WAS a surprise was the Fed’s “dot plot” (where Fed members forecast where they think policy rates will be over the next 2 years). 15 of the 19 members expect rate cuts of between 50 and 100 basis points (0.5%-1.0%) over the course of 2024. The median forecast was for 75 bps! Higher for (not much) longer! [Federal Reserve]
The stock and bond market rejoiced. The Dow and the S&P 500 rose to record levels. The yield on the 10-year US treasury bond dropped 30 basis points to 3.93% (not long ago it was threatening to move above 5%). The prices of mortgage backed securities ripped higher. [MBS Highway]
30-year mortgage rates in the 6s! Even before Wednesday’s big moves, average 30-year mortgage rates had already moved down to 6.82%. By midday Thursday, the average 30-year mortgage rate reported by Mortgage News Daily was 6.62% — and this will probably go even lower tomorrow. Mortgage rates have decreased by nearly 1.5% in just two months! [Mortgage News Daily]
Inflation keeps easing
The day before the Fed decision, the November CPI (Consumer Price Index = inflation for me and you) came out. The headline CPI was up just 0.1% month-over-month in November, after being flat in September. On a year-over-year basis, headline CPI eased from 3.2% → 3.1%. [BLS]
And on the day of the Fed decision, we got the November PPI (Producer Price Index = inflation for businesses), which was up just 0.9% year-over-year in November, down from +1.2% year-over-year in October. [BLS]
The National Association of Realtors’ economics team has adjusted their forecasts for 2024. Here’s what they’re looking for now:
When it comes to transaction volumes, this is one of the most bullish forecasts out there. (Fannie Mae and Realtor.com forecast flattish existing home sales.) So is the NAR just being an industry cheerleader?
I don’t think so. The NAR also has one of the lowest forecasts for mortgage rates. Makes sense, right? The bigger the bet you make on falling mortgage rates, the higher your forecast for existing home sales should be. And given what mortgage rates have done in the last two months, you can expect other forecasters to play catch-up.
Buyer activity recovered somewhat in December, as the recent 1% fall in mortgage rates coaxed some buyers back from the sidelines. Home prices continued to hold up better than transaction volumes. But with lower rates, slightly improved inventory, and spring around the corner, activity levels may have already bottomed.
The early Christmas presents keep arriving, and this week we got a big one. The Fed’s “dot plot” forecasts made it very clear that the majority of Fed members expect policy rates to be much lower by the end of 2024. In other words, they think that inflation has come down far enough (and/or the risks to the economy are high enough) to start cutting rates soon.
Throughout 2023, Chairman Powell has repeatedly used his press conference to pour water on any rate cut excitement. But no hawkish talk this time. Instead, he explicitly said that waiting to cut rates until inflation fell to the Fed’s 2% target (for core PCE) would be a mistake.
This ignited an “everything” rally: stocks, bonds, currencies etc. Higher mortgage bond prices => lower mortgage bond yields => lower mortgage rates. When the dust settled on Thursday, average 30-year mortgage rates had dropped to 6.62%. That’s down almost 1.5% in just two months!
The information provided in this blog was written by Scott Brixen from Brixen Mortar Real Estate.
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