Fed policy will change. How will mortgage rates react?
Federal Reserve Policymakers are expected to cut the benchmark interest rate on Wednesday for the first time in more than four years. But it seems anyone’s guess how big the cutbacks will be.
Rates traders on Tuesday afternoon gave shorter odds on a 50 basis point (bps) cut, which would push the Fed’s target back to 4.75% to 5%. According to the CME Group‘s FedWatch tool63% of traders expect interest rates to be cut by 50 basis points, while 37% are calling for a cut of 25 basis points.
Market observers, including several economists, have noted the recent rise in optimism for a bigger rate cut.
“After more than a year of being stable, the Fed is ready to cut rates this week. However, the lead-up to this meeting is proving to be remarkable,” said Emily Overton, a capital markets analyst for Veterans United Home Loanssaid a statement.
“Markets suddenly revised their expectations from 25 basis points to a 50 basis point cut, without any major data releases as a catalyst. We could very well see 50 bps as the first cut. Federal Reserve Chairman Jerome Powell has expressed concern about the labor market and does not appear to welcome further easing. The revised dot plot will most likely show further easing this year, averaging 50 to 75 basis points.”
Mortgage interest rates, which are not directly influenced by the overnight interest rate, have nevertheless fallen in recent months. Bee HousingWireThe average interest rate for a 30-year conforming loan was 6.34% on Tuesday, according to the Mortgage Rates Center. That figure was 13 basis points lower than a week ago and 26 basis points lower than two weeks ago.
“The recent decline in mortgage rates adds to the momentum towards normalization and unleashing the potential of the housing market in the coming years,” KernLogic That’s what chief economist Selma Hepp says. “About 4 million homes have a refinance option, with rates falling closer to 6%, and more are in the pipeline as the Fed begins the easing cycle.
“It’s important to note that lower rates have been a hot topic for some time, and potential homebuyers are on the sidelines waiting for lower rates and improved affordability.”
Fannie Mae Economists recently forecast a total of 5.19 million home sales for next year. That figure was lower than a previous estimate, but still higher than the 4.78 million sales expected in 2024.
The long-awaited rumors of a US recession have yet to materialize, although the economy has slowed significantly in 2024. The country added 142,000 jobs last month, well below last year’s monthly average of 202,000, and figures for both June and July have received significant downward revisions. Meanwhile, the unemployment rate has risen to 4.2% after reaching 3.4% in April 2023.
“The soft landing is working, and the Fed wants to stimulate the housing market while the economy is still in somewhat of a good position on inflation and consumer confidence,” said Charles Williams, CEO of Percy.ai. “They will have to cut rates even further to create a mini refinancing wave, and builders are building more starter homes now. So with additional interest rate cuts later this year, there will be a recovery in the housing market in 2025 in terms of both existing and new home sales.”
Sam Williamson, senior economist for First Americanbelieves that while the Federal Open Market Committee (FOMC) could discuss a 50 basis point cut on Wednesday, “which is unlikely as the Fed wants to avoid conveying a sense of alarm or signaling that they may be behind on cutting rates.”
Results of a Reuters poll show that a majority of analysts expect the Fed to make three rate cuts by the end of 2024, totaling 75 basis points. Depending on the FOMC’s actions on Wednesday, Williamson said investors could “recalibrate” their expectations by pricing in fewer cuts, which could lead to higher Treasury yields and mortgage rates in the near term.
