Latest mortgage rate update hits housing market

Homebuyers hoping for lower mortgage rates due to the Federal Reserve's 2024 interest rate cut may have to wait a little longer.

The housing market was still recovering from coronavirus-induced inflationary pressures and the Fed's stabilizing interest rate hikes, and was focused on relief from three expected policy adjustments later this year. But prospects for a rate cut dimmed Thursday when Minneapolis Fed President Neel Kashkari said the inflation data the Fed was seeing was not consistent with the expected pattern.

In an interview with Pensions and Investments, Kashkari spoke candidly about the Fed's woes.

“There's a lot of uncertainty about what's going on in the economy right now,” he said, adding that reopening the economy post-COVID-19 is challenging the Fed's ability to predict, and that it's better than traditional models. He pointed out that this has led to a reliance on inflation data. “It doesn't explain the inflation dynamics that we're seeing right now,” he said.

“The disinflation that we saw in the second half of last year was mainly due to the supply side of the improving economy,” Kashkari said. However, he expressed concern about recent inflation statistics, saying, “Inflation statistics in recent months are a bit concerning, and they are more likely to be flattening out than continuing to fall.''

This observation casts doubt on the Fed's expected trajectory toward its 2% inflation target, complicating future policy decisions that would have a positive impact on mortgage rates.

Kashkari's uncertainty was also reflected in his stance on rate cuts. “If inflation continued to retreat towards the 2% target, I had made a note in March of two rate cuts this year,” he said. But continued high inflation is causing him to reconsider, he said. “But if inflation continues to be flat, you're going to question whether we need to cut rates at all.”

For the housing market, experts say, this means a long-term rise in mortgage rates.

“We don't expect rates to fall significantly in the short term,” Sam Cater, Freddie Mac's chief economist, said Thursday, referring to the recent stagnation in mortgage rates.

His comments reflect a broader sentiment of uncertainty in the housing market, largely influenced by the tightrope of economic data. Current mortgage interest rates are set by Freddie Mac at an average of 6.82%, a notable increase from last year. While this number does not exceed the 7% threshold seen in previous swings, it represents a barrier to entry for many potential homeowners.

Even though consumer price inflation has recently risen to an annual rate of 3.2%, preventing the Fed from cutting interest rates, Carter said the housing market is adjusting in other ways.

“On the positive side, inventory has improved slightly, which should help limit home price growth.”

Home prices rose 5.5% year-on-year as of February, and are expected to continue to grow modestly, according to a report released Tuesday by data analytics firm CoreLogic.

The report said this growth suggests the market is responding to mortgage rates, inventory levels and economic sentiment. “House price growth reversed in February as the effects of the January 2023 house price index bottom finally wore off,” said Dr Thelma Hepp, chief economist at CoreLogic.

“As a result, annual home price growth should start to slow in the U.S. going forward,” he said.

Some buyers will be keeping an eye on the Fed's next move, and may find themselves navigating a market where opportunities are measured against a backdrop of economic data and policy direction.