Experts’ Take on Mortgage Rate Impact of Fed Rate Cuts

The economy experienced significant volatility from 2020 until the first half of 2023, with the Fed initially dropping the fed funds rate to zero due to the pandemic, leading to a surge in housing demand and a subsequent increase in home values. However, inflation began to rise rapidly, prompting the Fed to raise rates 11 times, resulting in a notable spike in the average 30-year fixed mortgage interest rate to a 22-year high of 7.79% in October 2023. While mortgage rates have stabilized between 6.5% and 7%, speculation about potential Fed rate cuts has emerged, raising questions about their potential impact.

Scott Haymore, a senior vice president at TD Bank, suggests that with increasing market certainty and inflation stabilization, rate cuts are likely, with Fed Funds futures contracts indicating three rate cuts starting in the year’s second half. However, experts have varying predictions regarding the extent of the rate drops. Some, like Afifa Saburi from Veterans United Home Loans, believe rates won’t decrease significantly in 2024, as the expected rate cuts are already factored into the markets. Conversely, Jeremy Schachter of Fairway Independent Mortgage Company anticipates rates to stay relatively high, with any significant rate cuts likely not occurring until later in 2024 or even into 2025, contingent on economic conditions. Overall, while some modest drops in rates are expected, returning to the lower rates seen in the past decade is unlikely in the near future.

Consider Delaying A Home Purchase?

Experts advise that if you find a home you love within your budget, it’s often best to purchase it without waiting for potential drops in mortgage rates. Dan Green, CEO of Homebuyer.com, emphasizes the unpredictability of mortgage rates compared to the stability of home values. He suggests that while you can refinance later if rates decrease, you may miss out on the opportunity to buy your desired home if you delay.

Moreover, waiting to purchase a home can have a significant opportunity cost due to home appreciation. Jeremy Schachter highlights that home values typically appreciate by 4 to 5% annually. Delaying a purchase until 2025 could mean missing out on potential appreciation, leading to higher home prices. Schachter suggests that buying a home and refinancing later if rates drop, known as “buy the home, date the rate,” can be a prudent strategy. Additionally, Ralph DiBugnara warns that a rate drop may attract more buyers, increasing competition and potentially driving home prices even higher.

Fannie Mae: March Home Sentiment Index Dips

In March, Fannie Mae’s Home Purchase Sentiment Index slightly declined by 0.9 points to 71.9, marking the first drop since November. However, perceptions regarding home buying and selling conditions showed a slight improvement. One significant factor influencing sentiment was the increase in the number of consumers expecting mortgage rates to rise over the next year, now standing at 34%, up from 32% in February. Conversely, only 29% anticipate a decline in rates. Despite this, the overall index demonstrated a year-over-year increase of 10.6 points, reflecting a positive trend compared to the challenging conditions experienced in 2023.

Currently, 21% of respondents perceive it as a “good time” to purchase a home, while 66% believe it is reasonable to sell. Household factors also played a role, with 77% expressing confidence in job security over the next year. Moreover, 19% reported significantly higher household income, with 12% experiencing a significant decrease. Fannie Mae’s Senior Vice President and Chief Economist, Doug Duncan, highlighted a potential adjustment in consumer expectations regarding the housing market to accommodate the current higher mortgage rate and home price environment. He noted a gradual increase in home listings and sales transactions expected in the coming year, driven by households recalibrating due to rate adjustments and others moving for various life reasons.

Source:

Vaimberg, Ron. “Weekly Newsletter – January 6, 2023.” Ron Vaimberg International, Ron Vaimberg, 6 Jan. 2023, https://rvionline.thinkific.com/courses/take/rvi-weekly-newsletter/texts/41523497-weekly-newsletter-january-6-2023.