Residential Real Estate News
U.S. Housing Industry Reacts to the Federal Reserve's Late 2024 Rate Cut
This week, the Federal Reserve reduced its key interest rate by a quarter percentage point, marking the third consecutive cut and signaling a cautious outlook for future reductions.
As widely expected by markets, the Federal Open Market Committee (FOMC) lowered the overnight borrowing rate to a target range of 4.25%-4.5%. This brings the rate back to its December 2022 level when it was on an upward trajectory.
While the decision itself was unsurprising, the key focus was on the Fed's guidance regarding future policy. With inflation remaining above target and economic growth relatively strong--conditions typically inconsistent with rate cuts--the central bank's tone attracted significant attention.
The Mortgage Bankers Association's chief economist Mike Fratantoni said, "The FOMC cut its rate target by another 25 basis points as the market had anticipated. However, while the cut was expected, and the statement was little changed, FOMC members' projections regarding the future path for the federal funds rate moved up in the near term, and for their expectations for the longer-term neutral rate. The median member now expects that there will only be 2 cuts in 2025 and that the federal funds target will be 3% in the long run. MBA forecasts that the federal funds rate will only drop to 3.75% this cycle.
"The projections also showed somewhat faster growth and somewhat higher inflation in the near term relative to the projections in September.
"While the unemployment rate has increased over the past year, and inflation has trended down, in recent months, inflation has plateaued. It was not surprising to see a dissent at this meeting, with one member voting to keep rates steady.
"Expectations that the Fed will cut rates less than had been anticipated have been priced into the market in the form of higher 10-year Treasury and higher mortgage rates in recent weeks. MBA's forecast for mortgage rates moved up after the election, anticipating this change and recognizing the market's reaction to the likely path for fiscal policy and the deficit. MBA is forecasting that mortgage rates will average close to 6.5% over the next few years, with significant volatility around that average."
The National Association of Realtors chief economist Lawrence Yun also commented, "Despite the cuts to the short-term interest rates by the Federal Reserve, mortgage rates have largely refused to budge. One reason is that consumer price inflation has not been fully contained and slightly accelerated in the past two months. Lending money over the longer term needs to compensate for future returned money's loss of purchasing power. More Fed-rate cuts are likely in 2025 because consumer prices should calm down measurably."
Yun continued, "Though multifamily housing starts tumbled this year, the completions of new apartments are still strongly rolling in from the previous year's high housing starts. The added supply will help cool rents. Therefore, the gap with the mortgage rates will not remain wide, which means mortgage rates will modestly trend lower. Given that mortgage rates have stayed above 6% for more than two years, consumers are getting used to the new normal, especially considering that the 50-year average is 7.7%. Jobs and inventory will drive home sales."
