Don’t count on rate cuts in the first half of 2024
Economists say inflation is not falling fast enough to convince the Federal Reserve to lower interest rates.
Key points:
- The latest Consumer Price Index data put the annual inflation rate at 3.1% in January, down from 3.4% in December.
- The economy remains hotter than expected, as many economists predicted inflation would drop below 3% in January.
- The Fed is unlikely to cut interest rates until inflation is closer to 2%, so 30-year mortgages could remain around 6.6% or higher for the spring homebuying season.
The U.S. economy is proving to be a difficult train to slow down, so homebuyers might have to settle for 30-year mortgage rates in the mid-to-upper 6% range — at least for a while.
The Feb. 13 Consumer Price Index data shows the economy is slowing, but not as quickly as economists were expecting. The annual inflation rate checked in at 3.1% in January, down from 3.4% in December. Many economists predicted inflation would dip below 3% in January on its way to the Federal Reserve's target rate of 2%.
Given the latest numbers, it's unlikely that the Fed will take action on interest rates soon, so those hoping for a March rate cut may have to keep waiting, said Danielle Hale, chief economist at Realtor.com.
"For the housing market, today's data means that mortgage rates are likely to hang on to the narrow range they've occupied since late December, while likely moving toward the upper end of that range," Hale said.
The CPI data for January came as a relative surprise to investors, sending the stock market down. That could lead to a short-term bump in 30-year mortgage rates. Following the release of the CPI report, Mortgage News Daily reported that rates rose from 6.96% on Feb. 12 to 7.08% on Feb. 13.
According to Freddie Mac's weekly survey, 30-year interest rates have remained in the 6.6% range since late December. The next report is scheduled to come out Feb. 15.
Rising rents a big factor
Housing — specifically rents — is one segment of the economy keeping inflation elevated, with the CPI data indicating that rent prices are rising at 6% annually. But other recent data points to slowing rent growth, said Lawrence Yun, chief economist for the National Association of Realtors.
First American Economist Ksenia Potapov agreed, noting that rent data used for the CPI tends to lag by up to 12 months, and current data shows rents have flattened, which should help push inflation down.
That's the hope, at least, because the federal government has few tools to address rising housing costs. Increases are largely driven by a lack of affordable supply and rising development costs, said Fan-Yu Kuo, an economist at the National Association of Home Builders.
"Additional housing supply is the primary solution to tame housing inflation," Kuo said.
With this latest inflation data, Yun doesn't expect rate cuts in the first half of 2024, but he believes the Fed will make several cuts in the final six months of the year. After initially predicting rates would fall to 6% by this spring, Yun is now expecting that to happen at the end of the year.
What does this mean for homebuyers?
With rates expected to be relatively stable heading into the spring season, the industry will see whether potential homebuyers are willing to accept mid-6% mortgages. Given that home prices are still rising and inventory levels remain low, 2024 is not looking much easier for buyers, said Lisa Sturtevant, chief economist at Bright MLS.
"The best advice for prospective homebuyers is not to wait for mortgage rates to come back down to where they were a couple of years ago — the super-low, pandemic-era rates are not coming back," Sturtevant said.
"Instead, buyers should take a close look at their finances, set realistic expectations about the home price they can afford, and, in many cases, expect to have to make compromises on the type or location of home that they can make an offer on."