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The Big Story: January 2024

The Big Story: January 2024

The Big Story

Mortgage rates are plummeting, but how far will they fall?

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Note: You can find the charts & graphs for the Big Story at the end of the following section.
 

A 1.18% mortgage rate drop matters … a lot

The next Fed meeting isn’t until the end of January, but financial markets have already made major assumptions about what the Fed will do in 2024. In the December 2023 meeting, Fed members indicated there would likely be three 0.25% cuts to the fed funds rate by the end of 2024, but they noted a high degree of uncertainty. Markets took this news and made their own conclusions. As of January 3, 2024, fed funds futures traders (the people who make a lot of money being right about where rates will go) expect the Fed to cut the federal funds rate by a quarter point six times in 2024. Currently, the fed funds rate is between 5.25% and 5.50%.
 
In any case, for the >70% of homebuyers who finance their purchases with mortgages, rate cuts are very good news, as shown by the month-over-month increase in sales. However, even before the December meeting, economic indicators seemed favorable for rate cuts, which, in part, caused mortgage rates to drop 0.57% in November 2023 — a significant fall from the 23-year high of 7.79% in October. Markets move a lot faster than the Fed, and the 1.18% mortgage rate drop in November and December brings to mind the trends we saw in the first quarter of 2022. In December 2021, Fed Chair Jerome Powell stated that they were increasing rates beginning in March 2022, but mortgage rates increased by about a point in the first quarter even before the Fed made any changes.
 
The 1.18% decline in mortgage rates has set the stage for a much busier spring and summer season, although we still expect a relatively slow first quarter. Interest rates are still too high for potential buyers and sellers to rush back to the market, especially when they expect further rate cuts. However, if mortgage rates were to drop another point to around 5.5%, a huge number of participants would jump back into the market. Remember that every 1% decrease in interest rates roughly equates to a 10% decrease in monthly financing costs. The inverse is also true, which is why rates have priced buyers out of the market and remain the primary cause of the market slowdown over the past two years.
 
Because inventory hasn’t grown, prices haven’t meaningfully declined. In fact, home prices currently fall only 8% below the June 2022 all-time high, which means that any savings will likely come from rate drops. Even if a significant number of sellers come to market, there’s enough pent-up demand that inventory won’t be able to grow enough for prices to stagnate or decline outside of normal seasonal trends. On top of that, home prices almost always appreciate. In other words, betting on home prices to decline is statistically similar to betting on 00 in roulette. Nationally, the median price will likely hit a new all-time high in June 2024. The National Association of Realtors’ Chief Economist Lawrence Yun recently remarked that home prices keep marching higher, and only a dramatic rise in supply will dampen price appreciation.
 
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.
 

Big Story Data

 


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