It’s decision time for the Fed, but it may be coming too late
While a rate cut — which could further drive down mortgage rates — would help homebuyers, there are other headwinds at play in the final months of 2024.
Key points:
- The Federal Reserve is expected to announce rate cuts on Sept. 18. The question is whether they will start with a 25 basis-point cut or be more aggressive.
- Market expectations have already pushed 30-year mortgage rates down to nearly 6%, the lowest level in a year.
- Lower mortgage rates don’t necessarily mean a home sales rally, however, as the selling season winds down and buyers still face high home prices.
With the Federal Reserve poised to start cutting interest rates for the first time in four years, there's hope in the real estate industry that it will lead to a late season rally — but current trends suggest agents should temper those expectations for now.
The Fed, which wraps up its September meeting tomorrow, has several options as it tries to balance taming inflation with a "soft landing" that avoids a recession. A key question for investors and housing market analysts is whether the Federal Reserve will cut interest rates by 25 basis points or opt for a more aggressive 50 basis-point cut.
With the outcome uncertain, 'it's pretty much impossible to avoid volatility'
Analysts are putting the odds of a 50-point cut at 40%, largely based on the cooling of the labor market last month, said Sam Williamson, First American senior economist — but he thinks the Fed will go with a smaller reduction to start.
"While a 50-basis point cut may be discussed during the meeting, it's unlikely because the Fed wants to avoid conveying a sense of alarm or signaling they may be behind the curve in cutting rates. Additionally, recent economic data hasn't shown further deterioration," Williamson said.
Mortgage rates have been trending down in recent weeks, however, suggesting that the markets may be predicting an aggressive cut. Mortgage News Daily estimated 30-year fixed rates were at 6.11% for Sept. 17, down nearly half a percentage point compared to a month ago. It's also near the 52-week low.
Traders aren't just interested in the size of the first cut — they will also be listening closely to what the Federal Reserve and Chair Jerome Powell have to say when discussing economic projections, said Matthew Graham, chief operating officer at Mortgage News Daily.
"This will be the first Fed meeting in a long time where there has been such an even split in forecasted outcomes. Any time an outcome is guaranteed to surprise about half the market, it's pretty much impossible to avoid volatility," Graham said in a Sept. 16 blog post.
What will this mean for home sales?
Even if mortgage rates decline further following the Fed meeting, there's no guarantee home sales will bounce back in the final quarter of 2024.
That's been the case in Canada, where the central bank started cutting rates in June. It made additional cuts in July and September, yet Global News reports home sales were down 2.1% in August compared to a year ago. One key difference between Canada's economy and the U.S. is the labor market in Canada is weaker — the unemployment rate was at 6.6% in August, versus 4.2% in the U.S.
Seasonality is also a factor. Inventory and buyer demand tend to wind down in the fall, and even if rates were to gradually decline for the rest of the year, they may not get low enough to unlock many of the homeowners who have ultra-low rates, Williamson said.
While lower mortgage rates will help with affordability, home prices remain high. Redfin reported that U.S. home prices rose 0.5% in August, the biggest month-to-month increase since April. There might be more buyers looking, but as fewer new listings hit the market, any mortgage relief could be offset by higher prices.
"Prices kept creeping up during this unusually slow summer for home sales as mortgage rates came down and supply remained stubbornly low," said Redfin Senior Economist Sheharyar Bokhari. "If mortgage rates fall further this fall — and we expect they will — price growth will likely pick up as more prospective homebuyers come off the sidelines."
Still hope for some action this fall
Despite the headwinds, a rally in home sales isn't out of the question. There was a small rally at the end of 2022 as interest rates declined, indicating that consumers do react to the movement of rates.
One sector of the real estate industry that could see a boost this fall if rates decline further is mortgage services. About 4 million homes could be ripe for refinancing with rates hanging around 6%, said Selma Hepp, CoreLogic's chief economist. But the industry may have to wait a bit longer to see a more balanced, active market.
"The recent decline in mortgage rates is contributing to the momentum toward normalization and unleashing the housing market potential in the next few years," Hepp said.