Although interest rates remained unchanged last week, the Fed’s next move may be to cut interest rates. Last week, Federal Reserve Chairman Jerome Powell emphasized that upcoming economic data will influence when the central bank decides to lower interest rates.
On Friday, a July labor report showed job growth slowed more than expected, reigniting fears of a recession. The unemployment rate rose to 4.3% from 4.1%, the highest level since October 2021.
Typically, bad economic data is matched by good mortgage rates, which track changes in long-term bond yields, particularly the 10-year note. The 10-year Treasury yield fell sharply after the latest labor report, and mortgage rates also plummeted.
Barring a sharp rise in inflation, experts are now predicting a bigger cut at the September meeting: half a percentage point or more, rather than a quarter of a percentage point. A second rate cut before the end of the year is also more likely. Those who have been waiting for lower mortgage rates, whether buying a new home or refinancing an existing loan, should finally see some relief.
Will mortgage rates drop in 2024?
The current average interest rate for a 30-year fixed mortgage is 6.75%, according to CNET sister site Bankrate. Since last week, the average interest rate has down 0.12%.
When the Fed starts cutting interest rates, borrowing rates on home loans also fall. Most economists and housing market experts expect the average interest rate on a 30-year fixed mortgage to drop by about half a percentage point by the end of the year.
A rate cut won’t immediately cause mortgage lending to fall. Instead, the cumulative effect of cooling inflation and the next phase of a series of interest rate cuts could make home ownership more affordable over the long term.
“I think 6.5% in early 2025 is a reasonable target,” said Erin Sykes, founder of real estate company Sykes Properties. Sykes believes that over the long term, mortgage rates will end up around 6%, marking a healthy balance between the extremely low-to-high volatility we’ve seen since 2020.
Will the Fed cut interest rates in September?
The Federal Reserve will have three more policy meetings in 2024 (September 17-18, November 6-7, and December 17-18). Since the Fed generally prefers to avoid adjusting interest rates close to a presidential election, we are unlikely to see major monetary policy changes at the November meeting.
Sykes said September will be the last chance to make budget cuts before Election Day.
In order for the Fed to lower interest rates, continued progress will be needed on both inflation and further labor market softening (i.e. rising unemployment). The latest jobs report may prompt the Fed to change its outlook and cut interest rates further at its September meeting (even if no emergency rate cuts occur before then).
It could also affect the number of rate cuts the Fed makes this year. The central bank’s latest summary of economic forecasts outlines just one interest rate cut in 2024, but may be forced to cut rates twice to avoid a recession.
Other factors currently affecting the real estate market
Today’s unaffordable housing market is caused by high mortgage rates, a chronic housing shortage, expensive home prices, and the loss of purchasing power due to inflation.
A balanced housing market typically has five to six months of supply. The average volume in most markets today is about half that number. Despite a surge in new construction in 2022, we’re still short about 4.5 million housing units, according to Zillow.
In early 2022, mortgage rates were near historic lows of around 3%. Mortgage rates roughly doubled in a year as the Federal Reserve began raising interest rates to curb inflation as it soared. Mortgage rates remain high through 2024, effectively excluding millions of potential buyers from the housing market. That is leading to slowdown in home saleseven during typically busy home buying months like spring and early summer.
Since most homeowners are Lock in your mortgage rate Below 6%, and some as low as 2% and 3%, they are unwilling to sell their existing homes because it means buying a new home with a significantly higher mortgage rate. Until mortgage rates drop below 6%, homeowners have little incentive to list their homes, leading to a dearth of resale inventory.
Although demand for home purchases has been limited in recent years, home prices remain high due to a lack of inventory. The median home price in the United States is $419,300 According to the National Association of Realtors, the annual increase was 5.8% in May.
High home prices make it difficult for potential buyers to afford down payments and large mortgages. according to a A recent study According to CNET sister site Bankrate, potential buyers need to have an annual income of Over $100,000 Afford a moderately priced house.
Inflation increases the cost of basic goods and services, reducing our purchasing power. It also affects mortgage rates: When inflation is high, lenders often set consumer loan rates to compensate for the loss of purchasing power and ensure profits.
although The inflation rate has While prices have cooled over the past year from a peak of 9.1% a few years ago, price growth remains significant. The latest inflation data showed annual inflation at 3%, still above the Fed’s 2% target rate.
Will mortgage rates hit 3% again?
A few years ago, home buyers could get home loans with interest rates between 2% and 3%. Mortgage rates will fall next year, but not to these levels. Real estate market experts say that only a severe economic crisis will bring mortgage interest rates below 3%.
read more: You will no longer get a 2% mortgage. How to adapt to different real estate markets
There is no single “average” mortgage rate. They vary widely, depending on how each source, whether a lender or a government-backed agency like Fannie Mae, compiles the data. You may find a difference of a few percentage points between the two sources.
Experts offer advice to home buyers
Rushing into a major purchase (such as a home) without knowing what you can afford is never a good idea, especially with current interest rates. In addition to having a clear budget for buying a home, experts also recommend:
Build your credit score. Your credit score is one of the main factors lenders consider when determining whether you qualify for a mortgage and what the interest rate will be. Working towards a credit score of 740 or higher will help you qualify for lower interest rates.
Save more down payment. A larger down payment will allow you to apply for a smaller mortgage and get a lower interest rate from the lender. If you can afford it, putting down at least 20% will also eliminate the need for private mortgage insurance.
Shop around for a mortgage lender. Comparing loan quotes from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders before making a decision.
Consider the rent vs. buy equation. Choosing to rent or buy is more than just comparing your monthly rent to your mortgage payment. Renting offers flexibility and lowers upfront costs, but buying allows you to build wealth and better control your housing costs. The best option depends on your financial situation, lifestyle and how long you plan to stay in a place.
Consider mortgage points. One way to get a lower mortgage rate is to buy using mortgage points. One mortgage point is equivalent to a 0.25% decrease in the mortgage interest rate. Typically, the fee per point is 1% of the total loan amount.
