09/20/2024
The FED rate cuts - what do they mean for you?
On Wednesday, the Fed lowered the Fed Funds Rate by 0.5%. This impacts all loans, including home mortgages, as we look toward the end of the year and into 2025.
My friend and long-time lender, Tom Reed of Intercoastal Mortgage, passed along plenty of detail about what this could mean if you are looking to buy soon.
To start, the Fed controls short-term borrowing rates, which directly impacts credit cards, HELOCs and a number of other short-term debts. If you have a credit card or a HELOC, the rate went down 0.5%. It does not mean that longer term debts like auto loans and mortgage rates dropped 0.5%. Why?
Mortgages are long term debt and do not move directly based on the Fed moving rates. Mortgage rates are set by investors and bond traders who purchase these loans. They have been expecting the Fed to drop rates now for a while; nearly 62% of traders surveyed expected the 0.5% cut prior to the fed meeting, which is why we saw improvement in the rates over the last 90 days.
They really look at two parts of every Fed meeting: what do they do (interest rate decision) and what do they say that will indicate what they will do in the future.
What they did – the .5% cut was very close to expectations of the market.
What they said – this is what caused mortgage rates to worsen slightly after the announcement. Traders were looking to hear that the jobs market was not doing well and the fed would aggressively cut rates in the future to combat a weakening economy. Powell essentially said, he doesn’t think it’s that bad. There is nuance in there, but that is the general tone of what he said. Traders were not thrilled with this, so they pulled back their pricing. If they had mentioned that they were seriously concerned with the health of the labor markets and that they would aggressively be cutting rates in the future to combat this, we would have seen rates come down further. But they didn’t.
While the Fed cutting rates is a good start to having mortgage rates trend downward in the long term (6-12 months), it just wasn’t the party bond traders wanted to see right now.
I have also attached a chart to show the movement of mortgage bond prices from yesterday to today. You can see as soon as they announced the 0.5% cut the market reacted positively to the news, then Powell opened his mouth and pricing tumbled down the hill! As it stands now, we are sitting at similar levels to pre-meeting activity.
We do believe mortgage rates will continue to fall over the next several months. We may be at 5.75% by the Presidential election and 5.5% by the end of the year… If all goes well!
As mortgage rates fall, Home prices will climb! Studies say that for every 0.5% drop in mortgage rates, 10 million buyers nationwide will jump into the market. These buyers, with stagnant inventory, will drive up home values as they all begin to compete for the available housing!
The answer: Buy now, take a mortgage that you can live with for 6 months to a year, then refinance when rates hit bottom!