Federal Reserve officials and most investors have long expected that borrowing costs would be reduced in 2024, at some point.
As of today, the Fed finally cut its federal funds rate (the inter-bank lending rate) by 50 basis points.
Why So Long?
At the end of last year, many were hopeful that the Fed would begin cutting rates early in 2024, easing pressure not just for consumers, but also for businesses. A spring rate cut seemed to be in the cards around the turn of the year and most prognosticators estimated the first cut would arrive sometime before the summer.
But for the first 8 ½ months, those rate cuts never materialized. Inflation was much, MUCH more stubborn than they anticipated and stayed above their target. The Fed was very cautious and wanted to see the numbers come down over the course of this year.
Interestingly, inflation has still remained over their 2% target…but unemployment has grown and is now over 4%.
However, all of that changed today, as the Federal Reserve cut their inter-bank lending rate by 50 basis points.
What Does That Mean for Mortgage Rates?
Interestingly, the Federal Funds rate does not directly control mortgage rates. And mortgage rates remained unchanged after the announcement.
Mortgage rates are far more influenced by the bond market…the 10-year Treasury to be exact. You can find the specifics here…
Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.
A far better way to track mortgage interest rates is by looking at the yield on the 10-year Treasury bond. The 30-year fixed mortgage rate and 10-year treasury yield move together because investors who want a steady and safe return compare interest rates of all fixed-income products.
U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages.
How? When Treasury yields rise, so do mortgage interest rates.
That’s because investors who want a steady and safe return compare interest rates of all fixed-income products…and investors move to these type of products to fulfill their needs.
Today’s Actions
We have seen a very nice move in the reduction of mortgage rates over the last 100 days, as the bond market has seen inflation slow a bit and unemployment rise. The bond and mortgage backed securities markets have been ahead of the curve on rates.
Rates have moved nearly .75% to the good for would-be buyers or refinancers.
I do believe we will continue to see rates move lower, but at an inconsistent pace. There will be bumps in the road…so locking in now might be a good idea.
Housing Pricing Pressure Ahead?
As rates move lower, more buyers will become eligible to purchase. In fact, the National Association of Realtors states that for every 1% decline in mortgage rates, 5 million more people can be eligible to buy.
Even if a small fraction of these eligible buyers decides to move forward, it will likely pressure prices higher and shrink the number of available home choices even further. More on that here…
The Bottom Line
Home price appreciation remains strong and inventory is slightly increasing. The fact that mortgage rates are coming down will only add to an increase in housing prices, as that’s basic supply and demand.
Home values continue to set new all-time highs, and housing still proves to be one of the best investments out there.
If you’ve been thinking about purchasing, now is a good time to do it! Reach out to me so we can strategize about your next purchase or refinance.
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