The Fed met January 30th through 31st and decided to keep its benchmark rate at a range of 5.25% to 5.50%, which it’s held since July 2023. The Fed board members left the meeting with a hopeful tone, but the meeting results are somewhat disappointing to those pushing for rate cuts in March. The door for cuts is cracked open, but we now expect rate cuts to begin closer to summer rather than in spring. Fed chairman Powell’s rationale is reasonable: the current rate levels seem to be working, and if it’s not broken, don’t fix it. The Fed’s dual mandate is for stable prices (inflation ~2%) and low unemployment. Currently, inflation is dropping, and unemployment is low, at 3.7%. Recession fears have declined once again, and the soft landing — slowing the economy without recession — that the Fed intended seems to be unfolding. Powell was quick to say the Fed does not have a growth mandate, which is correct, so the risks of cutting rates early will likely outweigh the benefits of cutting in March. However, if inflation continues to fall, and economic indicators are still favorable, rate cuts will likely start mid-year.
After the sharp mortgage rate drop in November and December 2023, the housing market saw real potential to warm considerably in Q1 2024, but now we expect a slower route to a healthier market. Mortgage rates remained steady at around 6.5% in January 2024, which is still about 1% higher than needed to get more participants to enter the housing market. We know the large mortgage rate drop from the 23-year high of 7.79% in October to around 6.5% wasn’t large enough to bring buyers and sellers back to the market, because the data now show that they didn’t come back. Sales reached a historic low, the number of new listings coming to market are near all-time lows, and inventory declined. This is due, in part, to normal seasonal trends — winter is when all those metrics tend to reach a seasonal bottom — but seasonality doesn’t fully explain those drops in the context of a substantial decline in rates. From October 2023 to January 2024, the monthly cost of financing a median priced home decreased nearly 13%, and the market still slowed on both the buyer and seller sides of the market, implying that rates are still too high for most would-be participants. However, we believe that if rates fall another percentage point, which roughly equates to another 10% decrease in monthly financing costs, the market will react positively and price more people into the housing market.
Another important aspect of the current market is the very recent positive changes in workers’ real earnings. The psychological effects of nearly 10 years of earnings growth, culminating in a final jump in the first two quarters of 2020, before dropping rapidly once COVID hit and inflation rose, was perhaps the most significant cause of the low economic sentiment in 2022 and most of 2023. People quickly become attached to the amount of money they make and the spending power of that money, so the feeling that it was taken away creates dissatisfaction. It’s also fair to say that part of the American dream is progressively increasing earnings as we age. But earnings didn’t keep up with inflation, so real earnings dropped, causing even more dissatisfaction. From 2021 to 2023, the purchasing power of the U.S. dollar declined 15%; therefore, earnings needed to increase 15% just to feel as financially well off as three years prior. For many, if not most people, earnings weren’t keeping up with inflation, and people don’t tend to buy homes when they feel less wealthy. However, after six straight quarters of real earnings growth, it makes sense that people broadly feel better about their finances, which will only benefit the housing market.
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
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