When will rates go down?
Question of the week: When will rates go down?
Answer: This is a question I, and everyone in the mortgage industry, has been asked at dinner parties, neighborhood gatherings, golf outings and on vacation when the John Deere salesman at the pool bar finds out what you do for a living.
My initial response is, “go down to what rate?”
I quickly get the answer they are really looking for out of the way—mortgage rates will never, never being most of our lifetimes, go down to where they were in the pandemic, the 3% range.
Short of a major catastrophe, a major economic depression or significant international armed conflict as examples, rates will very likely not go down to the 4% range either, except in the case of minor catastrophe(s).
For those wanting to move-up, or down, from their current home that has an extremely low “Covid rate,” around 3%, but are waiting for rates to come down to near their current interest rate—if you really want to move, raise considerably the rate you are okay with on your next home as you will likely never see your current rate in the market again.
With those expectations out of the way, we focus the discussion on the more immediate future, the end of this year, and all of next.
Long time readers of the WR&MU know that in general, poor economic news is good for mortgage rates (i.e. lower), and bad economic news is not good for mortgage rates (higher); with general political and geopolitical news having the same relationship.
While mortgage rates are not directly tied to the Federal Reserve’s benchmark rate, the reasons for the Fed moving its rate up and down are the same reasons investors buy or sell mortgage-backed securities (MBS), which dictate mortgage rates.
With inflation still well above the Fed’s target rate of inflation of 2%, the expectation, as provided by statements from Fed Chair Jerome Powell, is that the Fed will increase its benchmark one more time in 2023. This increase is pretty much priced into investment markets. What is unknown, to some extent, is what is the Fed’s plan leading into next year?
The plan will depend on economic activity through the end of the year, inflation, and labor markets. The past several months we have seen inflation slowing, while economic activity remains between moderate to strong from month to month.
If strong will the Fed stick with the expectations provided to investors over the past several months on only one more rate increase this year and then a hold to evaluate the economy, inflation, and jobs, for the first quarter or more in 2024? Or will the Fed lose its patience and enact another rate cut, or more in the 1st quarter and/or beyond in 2024?
If the Fed signals that it will push the pause button on rate hikes, investors will move into the MBS and bond markets to lock in the high rates. This increase in demand will move prices higher for those investments, thereby pushing rates down. When will this signal come that will put downward pressure on rates? That depends on when the Fed feels economic growth and inflation are “normal” and sustainable.
“Normal” will be when what is known as the Fed funds rate (the rate the Fed moves up and down) is at the “neutral rate,” the rate at which the Fed is neither stimulating nor depressing the economy. When the current cycle of fighting inflation is over, be it late in 2023, mid-2024, or ???, the economy should reach a period of stability at which the Fed will not change rates.
After the current cycle is over, the Fed will, at some point, slowly lower rates to find the “neutral rate.” When this period occurs, the Fed rate will be lower than it is today, and the range of the rate will be higher than it was from the period of the Great Recession to the Covid pandemic. From 2009 to 2015, the Fed funds rate was near zero; from 20215 to the middle of 2019, it slowly rose to 2.25-2.5%, today the rate is 5.00-5.25%.
When will the Fed end it pause and lower rates, and at what rate range will they stop lowering rates, thinking the rate is neutral. Some feel the Fed will begin to lower its rate in the 3rd quarter of next year, others later in the year. I have seen predictions that the rate range after the rate decreases will be between 2.75-3.5%.
What does all this economic gobbly-gook mean? What will rates be in the near future?
It’s always dangerous to make predictions that will be left on the world wide web, that said, my feeling is that the 30-year conforming rate will be between 6.75-7.00% at the end of this year. By the middle of 2024 the rate will be between 6.25-6.5% and at the end of 2024 5.75-6.00%. Depending on economic activity, world events, the 2024 Presidential and Congressional elections, rates could near 5-5.5% by the middle of 2025.
As I have written a few times this past year, when rates begin to drop, we will see an influx of buyers into the market, maintaining or pushing prices higher. At some point supply and demand will reach some sense of equilibrium, stabilizing prices, but how much higher will prices go and how low will rates be when that happens? I think we will be near that point when rates close in on 6%.
All this absent some major event pushing the economy into recession or depression.
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Rates for Friday August 25, 2023 Markets were holding their breath the past several days in anticipation of a speech the Fed Chair Jerome Powell was giving today at an annual retreat in Jackson Hole (swanky!). Powell helped mortgage rates by stating that given “cloudy” economic outlook that the Fed would move “carefully” before raising rates, “awaiting further date” resulting in a holding the current policy rate constant. Phew! said markets. We have rates flat Friday to Friday for the first time since the end of June, and the first time in five weeks the conforming rate is not higher than the prior Friday.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 7.25% Flat
30-year high-balance conforming 7.625% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
A very sad weekend across Long Beach and other areas of Southern California as it is the last weekend of the year for kids before they start school on Monday. With both our girls out of the house, one starting second semester of her junior year at Pace University and the other having graduated from Boston University last spring, we no longer have the school calendar as the house calendar.
In some ways I miss the dependable cyclical routine and school breaks. But mostly I don’t—glad that Leslie and I can manipulate our calendars however we want.
I hope everyone had a great summer, and for those with school age children, have a great school year.
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
