✅MORTGAGE RATES IMPROVE AGAIN✅
MORTGAGE RATES IMPROVE AGAIN
December 20, 2023
The Federal Reserve (Fed) has recently signaled a noteworthy shift in its monetary policy approach, particularly concerning the Federal Funds Rate. Here are the key highlights:
1. Stability in the Federal Funds Rate: Over the past year, the Fed had raised the Federal Funds Rate eleven times. However, in recent meetings, including the latest one, they opted to maintain the rate within a consistent range of 5.25% to 5.5%. This decision, which was unanimous, aligns with their stance in September and November.
2. Understanding the Federal Funds Rate: It's crucial to distinguish the Federal Funds Rate from mortgage rates. This rate specifically pertains to the interest rate for overnight interbank borrowing. The previous series of aggressive rate hikes aimed to curb economic momentum and address last year's elevated inflation.
3. Fed Chair Jerome Powell’s Remarks: Powell, in his press conference, acknowledged the positive development of inflation easing from its previous peaks. However, he cautioned that sustaining progress in controlling inflation isn't assured without further measures.
4. Future Prospects and Rate Cuts: While additional rate hikes haven't been ruled out, especially if necessary for inflation control, the recent meeting hinted at a potential shift toward rate cuts in the upcoming year. This expectation is reinforced by the "dot plot," indicating that 15 out of 19 Fed members anticipate rate cuts ranging between 50 and 100 basis points in the next year.
In summary, the Fed's recent decisions and forecasts reveal a cautious yet optimistic approach to managing inflation and economic growth, with a potential inclination toward reducing rates soon. Powell acknowledged inflation easing but emphasized the ongoing nature of the battle against inflation, reflecting the Fed's response to current economic conditions and progress made in inflation control.
But how is the economic landscape shaping up?
In November, the Consumer Price Index (CPI) showed a marginal inflation uptick of 0.1% from October, while the annual rate decreased from 3.2% to 3.1%. Core CPI, excluding food and energy, increased by 0.3% monthly, maintaining an annual rate of 4%. Declining energy prices helped offset rising costs in sectors like used cars and health insurance. Notably, inflation has significantly decreased from its peak last year, with the headline CPI at 3.1% and core CPI at 4%.
Similarly, the Producer Price Index (PPI) for November remained unchanged, signaling a cooling in wholesale inflation with an annual decrease from 1.2% to 0.9%. Core PPI remained stable for the month and declined annually from 2.3% to 2%.
In November, retail sales rose by 0.3%, surpassing expectations and showing a 4.1% increase compared to the same month in 2022. While lower gas prices led to reduced sales at gas stations, spending in other areas, such as online shopping, surged, contributing to a robust start to the holiday shopping season amid easing inflation.
Turning to employment, initial jobless claims hit a two-month low at 202,000 new filings, indicating a restrained level of layoffs as employers strive to retain workers. However, continuing claims saw a slight increase, reaching their second-highest level since November 2021. This upward trend in continuing claims suggests challenges in the labor market, with increased difficulty for individuals to secure new employment after being laid off.
WHEN WILL THE FEDS START TO CUT RATES?
In spring 2023, we witnessed a substantial surge in demand and activity as homebuyers adapted to the evolving circumstances. Buyers capitalized on a less crowded market, seizing the opportunity created by fewer competitors. The Federal Reserve's resolute stance, coupled with persistent headlines forecasting additional Fed hikes in 2023, led to a decline in the bond market and a continuous rise in mortgage rates. By October, the average 30-year fixed rate had peaked at 8.03%, prompting a significant downturn in demand.
Market predictions wield a profound influence on investor confidence. Consistent reports suggesting that Fed chair Jerome Powell could negatively impact the economy and the absence of prospects for a soft landing contributed to a steady increase in mortgage rates. Powell consistently emphasized the insufficient concrete evidence of improving inflation, reiterating the Fed's unwavering commitment to bringing inflation back down to 2%.
Following the recent Fed meeting, the bond market has shown improvement, causing mortgage rates to retreat to the range of 6.5-6.75%. Notably, average mortgage applications in November surged by 5% compared to October, and early December data indicates an almost 8% increase from November. Analyzing historical data that correlates mortgage application rates with existing-home sales reveals a positive trend for the housing market. As 2023 concludes, projections suggest that home sales will gain momentum, potentially reaching around 4 million in seasonally adjusted annualized sales (SAAR). This forecast is grounded in observed patterns linking mortgage application rates to the volume of home sales, hinting at a potential upswing in the real estate market.
It is crucial to recognize that daily decisions made by buyers and sellers should not solely rely on headlines. Understanding the intricacies of the markets is essential when advising clients, allowing for more informed and strategic decision-making.
The Fed dot plot serves as a visual representation of the interest rate projections put forth by individual members of the Federal Reserve's Federal Open Market Committee. Each dot on the chart signifies a member's perspective on the future trajectory of interest rates. While the Fed dot plot offers insights into the expectations of Federal Reserve officials, its accuracy in predicting future interest rates is varied. The projections are subject to change based on evolving economic conditions and unforeseen events. Consequently, while the dot plot is valuable for grasping the current sentiments of the Fed, it should not be regarded as an absolute forecast of forthcoming rate movements.
During the most recent Fed meeting, a noteworthy departure from the trend of rate hikes emerged, with significant mentions of potential upcoming cuts. The market's initial tendency to overestimate rate hikes has now shifted to a possible overestimation of rate cuts. It's important to note that a rapid decline in rates may lead to an increase in home prices as more buyers enter the market, intensifying concerns about affordability. While lower rates can motivate sellers to act, there is a potential for demand to outpace supply. As a result, conditions may soon become more dynamic, presenting an opportune time for making offers and engaging in negotiations.
In November, the seasonally adjusted annual rate of privately-owned housing starts exceeded expectations, reaching 1.56 million, notably surpassing the anticipated 1.36 million. This figure represents a 14.8% increase from October's revised estimate of 1.359 million and a 9.3% rise compared to the November 2022 rate of 1.427 million. Single-family housing starts experienced substantial growth, reaching 1.143 million, an 18% increase from October's revised figure of 969,000. Lower interest rates played a pivotal role in driving the surge in single-family homebuilding. Concurrently, homebuilder sentiment showed improvement, marking the first positive shift in five months. This boost was attributed to falling mortgage rates, which heightened buyer interest and sales expectations.
Presently, there are 680,000 single-family homes under construction, reflecting an 18% reduction from the peak observed in spring 2022. Simultaneously, the construction of nearly one million apartments is underway, a modest 1.3% below their peak earlier this year. Multi-family completions in November experienced a notable 27% month-over-month increase, expected to contribute to a reduction in rents. Further impact on rents is anticipated as ongoing multi-family construction continues.
Despite the substantial number of apartments and homes under construction, the U.S. housing market remains significantly underbuilt, with estimates of the shortage ranging from 3.5 to 5.5 million units. Even if the current construction were completed immediately, it would not fully address the housing shortage. While the situation varies by location, the need for new housing supply is critical, particularly as many homeowners with low mortgage rates are hesitant to sell. Builders are leveraging the limited resale inventory, and the recent decline in mortgage rates should further incentivize single-family home construction.
BUILDING WEALTH THROUGH REAL ESTATE
Opting for a 30-year mortgage to attain a lower monthly payment while concurrently expediting the repayment process is a strategy that combines flexibility with the potential for interest savings. Here's a breakdown of how you can implement this strategy and the potential benefits:
1. Make Extra Payments: By consistently paying more than the minimum required each month, you directly chip away at the principal amount. This reduction in principal leads to a decrease in the total interest paid over the lifespan of the loan.
2. Bi-Weekly Payments: Instead of adhering to monthly payments, consider making half of your mortgage payment every two weeks. This results in 26 half-payments annually, equivalent to 13 full monthly payments rather than the standard 12. This extra annual payment can significantly accelerate the repayment timeline.
3. Lump-Sum Payments: Whenever you come into extra cash, such as a bonus or tax refund, allocate it toward reducing your mortgage principal. This approach further diminishes the overall interest paid over the life of the loan.
4. Refinance to a Lower Rate (when available): As interest rates decrease, contemplate refinancing to a lower rate while maintaining the same monthly payment as your original loan. This method expedites the reduction of the principal. Notably, refinance applications have seen a notable 19% increase.
The potential savings from paying off your mortgage early hinge on factors like the interest rate, principal amount, and the extent to which you accelerate the loan payoff. To determine the most advantageous options tailored to your situation, let's connect via phone!
