The Federal Open Markets Committee (FOMC) held its short-term policy interest rate steady at a range of 5.25% to 5.5% at its last meeting of the year on Wednesday. It was the fourth pause recorded in 2023.
Federal Reserve Chairman Jerome Powell said that while inflation remains ‘elevated,’ the Fed anticipates making three 25 basis point rate cuts in 2024, a signal to Investors that hikes are over and a new phase in monetary policy is approaching.
In other words, hurrah!
The bond market responded in kind, with the 10-year Treasury yield falling to 4.0% late afternoon on Wednesday, its lowest level since late July.
“Additional rate hikes no longer appear to be part of the conversation. It is all about the pace of cuts from here,” said Mike Fratantoni, the chief economist of the Mortgage Bankers Association. “This is good news for the housing and mortgage markets. We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market. We are forecasting modest growth in new and existing home sales in 2024, supporting growth in purchase originations, following an extraordinarily slow 2023.”
In 2023, the Fed hiked the benchmark federal funds rate by a quarter-point at four meetings, most recently in July.
Financial conditions have eased since the last FOMC meeting on Nov. 1. The benchmark 10-year Treasury yield fell to 4.2% during the inter-meeting period from 4.8%. Simultaneously, futures markets priced in a higher chance of more rate hikes by the end of 2024.
Despite a stronger-than-expected November jobs report, the slowing growth pace of new jobs, the slowing of wage growth and the modest rise in the unemployment rate suggest a cooling of the economy in the coming year, Selma Hepp, chief economist at CoreLogic, said in a statement last week. Meanwhile, overall inflation slowed in November but core inflation remained stubbornly high. Many economists say the current Fed policy is restrictive enough, if not too restrictive.
Rate relief in 2024
At the beginning of November, Freddie Mac’s Primary Mortgage Market Survey index hovered just below 8%. It now sits just above 7%, bringing some relief to rate-sensitive homebuyers.
While conditions have improved, mortgage rates remain high. Prospective homebuyers bear the brunt of the lack of affordability while home sellers continue to cling to their historically low rate, pandemic-era mortgages.
No industry has been harder hit by the Fed’s monetary policy in 2023 than mortgage.
According to TransUnion, mortgage originations are down nearly 37% year-over-year, from 1.9 million in Q2 2022 to 1.2 million in Q2 2023. Dozens of lenders have gone out of business or been forced to merge in 2023.
Economists in the housing space see better days ahead.
“The Fed’s projections for 2024 will continue to anticipate a normalization in monetary policy in the year ahead,” said Realtor.com Chief Economist Danielle Hale.
Hale has forecast mortgage rates to ease further in 2024 as inflation improves and Fed rate cuts draw closer.
“Mortgage rates could near 6.5% by the end of the year, a key factor in starting to provide affordability relief to homebuyers,” Hale said.
Among the first customers to benefit from reduced interest rates would be those who are currently making payments on mortgages with high rates.
According to TransUnion data, since January 2021, there have been 3 million new mortgages originated with interest rates of 6% of higher, the total balance of which being over $1 Trillion. The monthly payments of each of these high interest mortgages averages $2,201.
If interest rates dropped to even 5.5%, it could result in significant savings for homeowners, as refinancing at that rate could result in an average monthly payment of $1,917 for them, a reduction of $284 every month, said Michele Raneri, VP of U.S. research and consulting at TransUnion. “This would represent nearly $300 a month that these homeowners would be able to use elsewhere in this continued high cost-of-living environment in which every dollar counts.”