Mortgage Forecasts: New Inflation Data Ensures Fed Cuts Next Week

Medium mortgage interest It rose to about 7% last month, but has recently fallen in the markets bet that Federal Reserve It will cut the federal funds rate on December 18.

Two data points are key to the Fed cutting interest rates by 0.25% at its final policy meeting of the year next week: slowing inflation and a weakening labor market. Wednesday’s Consumer Price Index report showed inflation rising 2.7% It was in line with investors’ expectations in November. Last week employment information showed a strong job market, but not excessively so.

Another interest rate reduction does not mean there will be mortgage interest move down immediately. The central bank has already cut interest rates twice this year, and mortgage rates are up, not down, due to continued strong economic data. Although affected by the Fed’s actions, home loan interest rates is more closely related to the movement in the bond market.

Mortgage interest It could still fall if economic data weakens and the Fed continues to cut interest rates. But that’s a big “if”.

Recently, progress towards reducing inflation to the Fed’s annual target of 2% has stalled. Meanwhile, the labor market shows no major downside. While the Fed wants to avoid keeping interest rates too high, it can driving the economy into recession — is also wary of cutting interest rates too quickly to see inflation rewarm.

There is also the question of whether President-elect Donald Trump’s economic policies and his plans to introduce sweeping tariffs and tax cuts will boost inflation.

according to Sam WilliamsonThe Fed’s decision to cut interest rates next week will not be based on future projections for the new administration, said First American Financial Corporation chief economist. However, if the White House pursues policies that prove to cause inflation, the Fed will consider all options, including a rate hike in 2025, Williamson said.

This is not good news for housing market or for homebuyers who are left out of compounding rising mortgage rates, rising house prices and limited supply.

Read more: 2025 Mortgage Forecast: Low rates unlikely to return under Trump

How do economic data drive mortgage interest rate movements?

Inflation and laboratory data it acts as a barometer for the health of the economy and influences the Fed’s decision to adjust the short-term interest rate down or up. The central bank has two main objectives: to maintain maximum employment and to prevent inflation.

When inflation peaks in 2022, the Fed raises interest rates to dampen demand and limit price growth. The Fed moved to cut interest rates earlier this fall as data pointed to cooling inflation and a slowing job market.

Bond market investors also rely on economic data to predict future Fed policy moves, and mortgage rates are driven by bond yields, he said. Melissa KohnRegional Vice President at William Raveis Mortgage.

For example, bond yields and mortgage rates fell significantly before the Fed cut rates on September 18, but quickly rose in response to a strong jobs report in early October.

Home loan rates rises often but falls slowly. For example, it may take several soft economic reports to send mortgage rates lower, but only one strong piece of data to send them higher.

Read more: What Mortgage Rates and Labor Data Mean for the Fed

Are mortgage rates higher because of the election?

It is no coincidence that mortgage interest rates rose significantly after the election results were confirmed early last month.

In October, markets started to “price in” in defense of Trump’s victory, which prevented much of the mortgage decline seen through the end of the summer.

“Currently, there is upward pressure on mortgage rates due to fears of rising debt and deficit levels and recognition that the incoming Trump administration could help the economy grow,” he said. Ali Gurdchief economist at home construction data company Zonda.

Fed Chairman Powell said it’s too early to say How Trump’s policies and the Republican-led Congress could change the central bank’s approach to regulating interest rates.

What are the predictions for mortgage rates in 2025?

Although a rate cut is guaranteed next week, this could be a temporary relief.

“I expect a decline in December and then wait and see from there,” he said Greg SherManaging Director of NFM Lending.

With inflation still above target and job growth strong, bond market investors now expect fewer Fed rate cuts and higher long-term interest rates, which will continue. upward pressure on mortgage rates.

While experts are optimistically calling for rates to fall closer to 6% by the end of 2024, that is less likely. Fannie Mae now waiting for the middle 30-year fixed mortgage rates It will remain above 6.5% until the beginning of 2025.

“If the economy continues to remain on solid footing, we will likely see some downward movement in mortgage rates,” Cohn said.

In other words, interest rates will only fall if the economy weakens in 2025. This means that housing affordability will not change much in the short term.

What else is happening in the housing market?

Today’s unaffordable housing market a result of high mortgage rates, a long-term housing shortageloss of purchasing power due to expensive house prices and inflation.

🏠 Low housing stock: A balanced housing market typically has five to six months of supply. Today, most markets are close to half that amount. Although we saw new construction growth in 2022 Zillowwe still have a shortfall of about 4.5 million homes.

🏠 High mortgage degrees: At the start of 2022, mortgage rates were near historic lows of around 3%. As inflation rose and the Fed began raising interest rates to tame it, mortgage rates nearly doubled in a year. In 2024, mortgage rates are still high, forcing millions of potential buyers out of the housing market. that’s it caused a slowdown in home saleseven during typically busy home buying months like spring and early summer.

🏠 Rate-lock effect: Because most of the homeowners tied to mortgage interest With rates as low as 6%, some as low as 2% and 3%, they don’t want to sell their current home because it means buying a new home with a much higher mortgage rate. Until mortgage rates fall below 6%, homeowners have little incentive to list their homes for sale, leaving a shortage of resale inventory.

🏠 High house prices: Although demand for homes has been limited in recent years, home prices remain high due to a lack of inventory. The median US home price was $434,568 It rose 5.1% year over year in September, according to Redfin.

🏠 Rapid inflation: Inflation increases the price of basic goods and services and reduces our purchasing power. It also affects mortgage rates: When inflation is high, lenders typically raise interest rates on consumer loans to make up for the loss of purchasing power and make a profit.

Expert advice for home buyers

Rushing is never a good idea buy a house Set a clear home buying budget without knowing what you can afford. Here’s what experts recommend before buying a home:

💰 Build your credit account. Your credit score is one of the main factors that lenders consider whether you qualify for a mortgage and at what interest rate. works toward a credit account A score of 740 or higher will help you qualify for a lower rate.

💰 Save for a bigger down payment. Bigger down payment it will allow you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, putting down at least 20% will also eliminate the need for personal mortgage insurance.

💰 Shop for mortgage lenders. It can help you compare loan offers from multiple mortgage lenders 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. Choose rent or buy a house not just comparing the monthly rent to the mortgage payment. Renting offers flexibility and low upfront costs, but buying allows you to build wealth and have more control over your housing costs. The best choice depends on your finances, lifestyle and how long you plan to stay in one place.

💰 Consider mortgage points. One way to get a lower mortgage rate is to buy it down using it mortgage points. One mortgage point equals a 0.25% reduction in your mortgage interest rate. Generally, each point will cost 1% of the total loan amount.

Learn more about today’s housing market