Hi Friends!
The Federal Reserve is getting ready to cut interest rates this Wednesday, but the big question is: will it be a 25 or 50 basis point cut? Just last week, the chance of a 50bp cut seemed low, around 15%, but that has now jumped to 65%. A lot of this shift is due to Wall Street Journal writer Nick Timiraos, often referred to as the "Fed Mole," who has a reputation for signaling the Fed’s moves. In his latest article, he talked about the pros and cons of both a 25bp and 50bp cut, even quoting former Fed Vice Chair Donald Kohn, who suggested the risks in the labor market now support a larger 50bp cut. The market took that as a clue that the Fed might make a bigger move.
But it’s not just about the rate cut. The tone of the Fed, what Jerome Powell says at his press conference, and the Fed’s economic projections (known as SEP) will be just as important. Today, former Fed Vice Chair Lael Brainard, now Director of the National Economic Council, commented that the inflation surge of the past three years is largely behind us. While she’s no longer at the Fed, her words add support for a bigger 50bp cut.
"We’re at a key turning point. Inflation is coming back down to normal levels, and it’s important to protect the progress we’ve made in the labor market," Brainard said in a prepared statement.
It looks like the Fed might be preparing us for a bigger rate cut.
What This Week’s News Means for You
Here’s what to keep an eye on this week, and why it matters to homebuyers, realtors, and investors alike:
August Retail Sales Data (Tuesday): This data gives a sense of how strong consumer spending is, which is a big part of the economy. If sales are high, it could show that the economy is doing well, but it might also raise concerns about inflation. That could impact mortgage rates down the line.
August Building Permits Data (Wednesday): Building permits are a forward-looking indicator for housing supply. An increase in permits might mean more homes will be built soon, which could help ease pressure on home prices. This is crucial for realtors who track housing inventory trends.
Fed Interest Rate Decision (Wednesday): This is the big one. The Fed’s rate cut will directly impact mortgage rates. A 50bp cut could lead to lower mortgage rates, making it easier for buyers to enter the market. A smaller 25bp cut might not have as strong of an effect.
Fed Press Conference (Wednesday): Jerome Powell’s comments and the Fed’s outlook will give us a better idea of where interest rates are headed in the future, helping homebuyers and investors plan their next steps.
Philly Fed Manufacturing Index (Thursday): This reflects manufacturing activity in the Philadelphia region. Strong numbers could show continued economic strength, while weaker numbers might suggest the economy is slowing, which could influence the Fed’s future moves.
August Existing Home Sales Data (Thursday): This report will show the latest trends in home sales. A strong report could indicate healthy demand, but it might also mean that inventory is tight, keeping home prices high. This data is key for homebuyers and realtors who want to understand the current market.
Finally, don’t miss our "Truth Behind The Headlines" webinar on Thursday at 10 AM PST. We’ll break down what the Fed’s decision means for mortgage rates and the real estate market.
Why It All Matters
This week’s events, especially the Fed’s rate cut, are going to set the tone for mortgage rates and housing affordability. Whether you’re buying, selling, or investing, it’s critical to stay informed. Realtors, especially, need to understand how these market changes affect their clients. Being able to explain how the Fed’s moves impact mortgage rates is essential.
What Is an Inverted Yield Curve and Why Should Homebuyers Care?
An inverted yield curve happens when short-term interest rates are higher than long-term ones, which is unusual. Why does this matter for homebuyers? It often signals a recession could be on the way. During a recession, mortgage rates tend to drop as the Federal Reserve cuts rates to stimulate the economy, potentially making home loans more affordable. However, recessions also bring challenges like job losses and stricter lending standards, which could make it harder for some to get approved for a mortgage.
The recent flip in the yield curve, where the 10-year Treasury yield is now higher than the 2-year yield, has historically happened just before a recession:
- March 2007: Recession started 10 months later.
- December 2000: Recession started 4 months later.
- June 1989: Recession started 13 months later.
However, the 3-month yield is still higher than the 10-year yield, which means the inversion might stick around until the Fed cuts rates significantly. While a recession isn’t a sure thing, the yield curve’s track record points to economic weakness ahead.
Recessions and Real Estate: A Look Back
Here’s a quick look at some of the major U.S. recessions in the past 30 years and how they impacted real estate:
- Early 1990s Recession (July 1990 – March 1991): Minimal impact on home prices, with a slight decline.
- Dot-Com Bubble Recession (March 2001 – November 2001): Home prices actually continued to rise.
- Great Recession (December 2007 – June 2009): Significant decline in home prices as the housing bubble burst.
- COVID-19 Recession (February 2020 – April 2020): Home prices increased due to low mortgage rates and high demand.
Home Price Trends: 2018–2024
From 2018 to 2024, home prices in the U.S. increased by approximately 40-50%. Here's a breakdown:
- 2018-2019: Home prices increased 3-5% annually.
- 2019-2020: Prices rose another 4-5%.
- 2020-2021: The pandemic caused a housing boom, with prices jumping 10-15%.
- 2021-2022: Prices surged again, with 15-20% growth in many markets.
- 2022-2023: Growth slowed but remained strong, with 5-10% increases.
- 2023-2024: Home price growth stabilized to around 3-5%.
As of June, U.S. real estate hit a new record of $49.6 trillion in value. That’s a $3.1 trillion increase over the past year, marking a 6.6% jump. The value of U.S. homes has doubled in just eight years.
When Is the Right Time to Buy?
The answer is simple: when you can afford it. Timing the market perfectly is nearly impossible. What we’ve learned from years of forecasting is that predictions can be wrong. The best strategy is to use sound logic, plan ahead, and make decisions based on your financial situation, not market speculation.
