Key Takeaways:
– Federal Reserve Chair Jerome Powell left open the possibility of a future interest rate hike.
– However, most housing professionals believe that the Fed may be done hiking interest rates for 2023.
– Tight financial and credit conditions, slowing inflation, and high 10-year Treasury yields are likely to discourage further rate hikes.
– The 10-year Treasury yield, which affects mortgage rates, fell to a two-week low after the Fed held interest rates steady.
– Fed officials had forecasted one more rate hike in 2023, but the majority now believes rates will finish the year around 5.6%.
– The Fed is expected to pause on rate hikes to bring down inflation and provide relief in the mortgage industry.
– Inflation is still climbing faster than the Fed’s target, but the economy is starting to slow down.
– The government funding deadline and the Israel-Hamas war may influence the Fed’s decision on interest rates in December.
– Some economists predict the Fed may cut interest rates in the second quarter of 2024.
– Powell clarified that the committee is not currently considering rate cuts and is focused on reducing inflation to 2%.
– The best-case scenario is for the Fed to keep rates steady in December, but a slight rate hike is also possible depending on inflation readings.
– The housing affordability crisis may worsen if rates increase further.
– While the odds of another rate hike are low, the Fed is expected to keep the option open.
– Improvement in economic data and lower inflation will be important drivers of lower rates.
HousingWire:
Federal Reserve Chair Jerome Powell left the door open to a future interest rate hike on Wednesday, but most housing professionals are hopeful that the Fed may be done hiking interest rates for 2023.
Tight financial and credit conditions, slowing inflation and high 10-year Treasury yields – the primary driver in the rise of longer-term interest rates – will likely discourage the central bank from a further rate hike this year, economists and mortgage professionals said.
In turn, this will provide relief and bring down stubbornly-high mortgage rates.
“I think the one thing I take away from today is that financial and credit conditions are tighter now, which was different than before,” said Logan Mohtashami, lead analyst for HousingWire. “Unless the 10-year Treasury yield falls considerably, the stock market rallies and home sales start to take off again, December should be off the mark.”
The 10-year Treasury yield, which acts as a benchmark for mortgage rates, fell to a two-week low at 4.766% on Wednesday after the Fed held interest rates steady in a range of 5.25%-5.5%.
Fed officials forecasted one more rate hike in 2023 in its September dot-plot estimates, which shows the range of forecasts for where interest rates could end up. The majority of Fed officials had expected interest rates to finish the year at around 5.6%.
Marty Green, principal of Polunsky Beitel Green, described the Federal Reserve as a “blackjack player with two face cards.”
“The only sensible play at this meeting was to hold pat,” Green said. “It is becoming increasingly clear that the Fed is indeed done raising rates in this cycle. While the cycle has been inordinately painful to the mortgage industry, with another interest rate pause, we should be at least one step closer to some relief in 2024.”
Inflation has fallen significantly since hitting a four-decade high last summer, but consumer prices have increased by 3.7% in September year-over-year, still climbing faster than the Fed’s target of 2%.
The economy is starting to slow down and inflation will moderate at a pace that suits the Fed, said Melissa Cohn, regional vice president of William Raveis Mortgage.
“We’re coming up against Nov. 17, when the government funding ends,” Cohn said.
Coupled with the Israel-Hamas war, the central bank could keep the Fed’s pause on another interest rate hike for a third consecutive month after its next meeting on Dec. 12-13.
“Even though Q3 economic growth came in quite strong, and several job market indicators continue to show strength, so long as inflation continues to come down, the Fed is likely to pause at this level for some time,” Mortgage Bankers Association‘s SVP and chief economist Mike Fratantoni said.
Fratantoni went a step further in anticipating the Fed to cut interest rates in the second quarter of 2024.
“If the Fed does indeed move to cut rates next year and signals its intent to do so, mortgage rates should trend downward. Our forecast calls for this to happen, which would support a somewhat stronger spring housing market,” Fratantoni said.
Powell, however, made clear on Wednesday that the committee is “not thinking of rate cuts” and is intent on bringing inflation down to 2%.
The best-case scenario is for the Fed to keep rates steady in December, said Raunaq Singh, founder and CEO of Roam, a platform for affordable homeownership.
Depending on November’s inflation readings, a slight rate hike in December is also likely, he noted.
“This will exacerbate the housing affordability crisis, which has already reached an all-time low,” Singh said. “Median monthly mortgage payments are at an all-time high. More than 50% of mortgages have monthly payments north of $2,000, whereas two years ago that number was more like 18%.”
While the odds of an additional rate hike is low, the Fed is expected to keep the option on the table, Danielle Hale, chief economist for Realtor.com, raised a cautious view.
“As long as a rate hike is on the table, investors are likely to position cautiously, and the tendency for rates to remain steady to slightly higher remains,” Hale said.
Improvement in data should reflect lukewarm readings on the economy and lower inflation, which will be more important drivers of lower rates, she explained.
At the final FOMC meeting in December, two months of inflation and labor market numbers will be reviewed to determine the direction of future interest rates.
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Property Chomp’s Take:
The Federal Reserve Chair, Jerome Powell, recently hinted at the possibility of a future interest rate hike, but many housing professionals are optimistic that the Fed may be done raising rates for the rest of 2023. This news comes as a relief to those in the housing industry, as tight financial and credit conditions, slowing inflation, and high 10-year Treasury yields have been driving up mortgage rates.
Logan Mohtashami, lead analyst for HousingWire, noted that financial and credit conditions are currently tighter than before. Unless there is a considerable drop in the 10-year Treasury yield, a stock market rally, and an increase in home sales, it is unlikely that there will be a rate hike in December. The 10-year Treasury yield, which influences mortgage rates, recently hit a two-week low after the Fed decided to keep interest rates steady.
In September, Fed officials had forecasted one more rate hike in 2023, with most expecting interest rates to finish the year at around 5.6%. However, Marty Green, principal of Polunsky Beitel Green, believes that the Fed is done raising rates in this cycle. This pause in rate hikes could bring some relief to the mortgage industry in 2024.
While inflation has fallen since reaching a four-decade high last summer, consumer prices are still climbing faster than the Fed’s target of 2%. Melissa Cohn, regional vice president of William Raveis Mortgage, believes that the economy is slowing down and inflation will moderate at a pace that suits the Fed. She also mentioned that the upcoming government funding deadline and the Israel-Hamas war could contribute to the Fed’s decision to pause on another rate hike in December.
Mike Fratantoni, SVP and chief economist of the Mortgage Bankers Association, anticipates the Fed to cut interest rates in the second quarter of 2024. This could lead to a downward trend in mortgage rates and support a stronger housing market in the spring.
However, Powell made it clear that the committee is not considering rate cuts at the moment and is focused on bringing inflation down to 2%. Raunaq Singh, founder and CEO of Roam, believes that the best-case scenario is for the Fed to keep rates steady in December, although a slight rate hike is also possible depending on November’s inflation readings. Singh expressed concerns about the housing affordability crisis, with median monthly mortgage payments at an all-time high.
While the odds of an additional rate hike are low, Danielle Hale, chief economist for Realtor.com, advises caution as long as a rate hike remains on the table. Investors are likely to position themselves cautiously, and rates may remain steady or slightly higher. Hale believes that improvements in data, lukewarm readings on the economy, and lower inflation will be the key drivers of lower rates.
The direction of future interest rates will be determined based on two months of inflation and labor market numbers, which will be reviewed at the final FOMC meeting in December.
