Feds are Expected to Lower Mortgage Interest Rates

As of the December 13th Federal Open Market Committe (FOMC) meeting, the Federal Reserve indicated they are likely cut interest rates by a total of .75 basis points. This would be the first time that federal funds rate would be lowered since March of 2020. That means there have been nothing but increases of at least ¼ point or the Fed has not made any changes. Reductions would be so welcomed!!

 The FOMC manages monetary policy--the supply of money and the cost of credit. They meet eight times each year, look at inflation rates and decide what adjustment to make to the Federal Funds Rate which is influential on the mortgage interest rates. This rate is measured in basis points (bps). Rates can change one-fourth-point, 1/2 a point, or more. The average inflation rate is not available for 2023 until January 11th. When the FOMC meets this January 2024, they will adjust basis points (bps) and the mortgage rates will change.

Inflation Rates and Interest Rates

What does inflation have to do with mortgage interest rates? The Consumer Price Index (CPI) measures the inflation rate. This index looks at prices of goods and services in the economy, including food, cars, education, and recreation. Inflation rates are influenced by several factors--natural disasters, like Hurricanes, crisis, like COVID and the shutdowns of businesses, employment levels, stimulus checks, and money other factors. 

The Feds cool down or tame inflation by raising the rates to bring down prices which can also slow the economy. Too slow means a recession. To speed up the economy the Feds will lower the rates. You feel it. At the grocery store, at the gas station. The price of everyday goods has increased so much. And so have the mortgage interest rates.  Higher rates means buyers have more choices and sellers are offering contributions to closing and price reductions. While real estate is hyperlocal and some areas will still sell for full price, buyers have still negotiated concessions. Many homebuyers have waited for lower rates or were pushed out of the market due to higher payments.

If you are selling your home, and the buyer is now able to afford the payment with a new mortgage rate, more buyers could enter the market. Those that have waited are now motivated. This could increase competition for homes, putting sellers in a better position. Sellers may be less motivated to negotiate price or offer concessions. 

Does this mean we will see another market like we did with rates at 3%. Do not count on it and certainly do not wait for it. To see this much change brings back fierce competition with buyers paying over appraisal amounts, higher prices, and very competitive terms.  The Fed meets four times next year and a total of 3/4 point reduction in the federal funds rate.  It is likely and predicted that mortgage rates could be in the area of 5.5%. 

Months of Inventory--Seller's Market or Buyer's Market?

Months of inventory determines who the market favors. This is determined by how long a home sells if no other homes enter the market. In 2021 we saw a sellers’ market where homes sold for well over appraised values. Lake Jackson single family homes months of inventory for 2021, and 2022 were at 1.1 and 1.7, respectively, meaning a home on the market would sell for an average of 1.5 months according to Texas Realtors Market Viewer. Texas Realtors has not released 2023 average months of inventory, but HAR MLS shows 3.8.  Meaning it takes a little over 3 months for a home to sell if no other homes become available.  Anything less than six months of inventory indicates a sellers market.  Lower mortgage rates brings out more buyers which could push the market more towards the sellers favor, meaning the market will still favor the sellers, but there may not be as much negotiation or concessions.

"It's and Election Year --so the Mortgage Prices will Drop"  

One comment I hear often is that mortgage interest rates influenced by election years.  I did a little resaearch. Reduction in interest rates have occurred in the past 5 elections with inflation rates varying through the election years. Further back the late  70s and early 80s do show mortgage rate increases during election years. 

 A look at the graph shows decrease in all recent election years. For the 1980 election year showed 13.74% mortgage rates (yes that says 13.74%) and inflation at 13.5. The prior year, 1979 showed lower interest rates of 11.2% and inflation 11.35. Year 2024 is expected to see lower rates, meaning this year will ring true for election.  One thing you can always count on, change always happens. 

Sources: Forbes.com, bls.gov, usinflationcalculator.com, FreddieMac.com, Mortgagereports.com Businessinsider.com, Nerdwallet.com, Yahoofinance.com