With the Federal Reserve’s announcement that it will again leave its benchmark lending rate unchanged, the central bank has ended its two-year campaign of tightening credit and is expected to begin easing rates downward.
The December 13 news that there would be no change in the benchmark rate, known as the federal funds rate, included indications of up to three rate cuts in 2024. Those could in turn bring about a drop in mortgage rates.
“Our house view is that we will see [federal funds] rates hold steady through the end of the year and that we will see the first rate cut in March of 2024,” says Matthew Vance, Americas head of multifamily research at CBRE.
“We do expect that [mortgage] rates will continue to tip down incrementally,” says Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors, or NAR. “By the spring of 2024…rates will hopefully be in the 6% range.”
The Fed paused its rate hikes in September and extended the pause just over a month later. The average 30-year, fixed-rate mortgage rate declined from nearly 8% in late October to 7.03% as of December 7, according to Freddie Mac.
Loan Rates Not The Lone Cause of Unaffordable Housing
The Fed’s actions can cause significant changes in the housing market, as its federal funds rate is the biggest influencer of current mortgage rates. A decision by the Federal Open Market Committee, or FOMC, to lower the Fed’s rate could quickly lead to more affordable home loans.
Bringing down home prices will take longer. Those prices are expected to fall only when the housing supply increases–and building enough new homes could take years.
The inventory of new homes for sale decreased 5.4% in September from the previous year, according to Freddie Mac’s latest outlook report. Meanwhile, limited housing supply has kept home prices rising for four consecutive months. October’s median price of $391,800 was up 3.4% from a year ago, according to the latest NAR data.
The shortage of affordable homes is “a huge issue with so many long-term ramifications. It’s a dangerous issue,” says Vijay Marolia, managing partner and chief investment officer at Regal Point Capital, which invests in real estate. If Fed rate hikes are over, Marolia says, rising home prices should slow down in the next three to six months.
When Will Mortgage Rates (Really) Fall?
Most observers are expecting the Fed to begin cutting rates in the first half of 2024. Newly released projections by members of the FOMC have the fed funds rate falling to an estimated 4.6% in 2024. That suggests the Fed will cut rates by 0.75 percentage points in total; the change could take the form of multiple rate cuts during the year.
“Our baseline scenario is that we will have two additional rate cuts next year as the economy slows,” says Vance at CBRE, which is projecting the Fed’s first rate cut to be 25 basis points. “As interest rates do come down, we expect to see the supply of for-sale homes on the rise.”
Lautz notes that a rate decrease doesn’t have to be big to be meaningful. Saving a few hundred dollars a month thanks to a lower mortgage rate “can be a game changer for some consumers,” she says.
Should I Buy a House in 2024?
If you want to buy now, given the high home prices and loan rates, experts say you should plan to stay in the new home for more than five years. By then you would have built the equity that would make the hefty investment worthwhile.
“If that potential homeowner only plans on living there for a couple of years, for example, maybe it doesn’t make sense and they need the flexibility that renting provides at this moment,” Lautz says. “They [can] buy later on down the road.”
If purchasing a home now or in 2024 makes you financially uncomfortable, don’t do it. Instead, use this time to save for a larger down payment. This can be a savvy move when traditional savings products are fetching high yields, like a 5.83% certificate of deposit, or CD.
“That is a strategy I think some people are employing,” says Bill Banfield, executive vice president of capital markets at Rocket Mortgage, who says his daughter invested in a 12-month CD to beef up her down payment while she waited to buy a home.