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TOO SOON FOR FED RATE CUTS?

Yesterday, the European Central Bank member Holzmann said Its possible that we’d see no rate cuts in 2024.

TOO SOON FOR FED RATE CUTS?


Yesterday, the European Central Bank member Holzmann said Its possible that we’d see no rate cuts in 2024. Here’s the exact quote:


“The geopolitical threat has increased because what we saw until now by the Houthis — I think it's not the end, it might be the overture to something much more broad based, which will impact the Suez Canal and increase the prices there. We should not bank on the rate cut at all for 2024.”


The U.S. and European economies are interconnected through trade and investment. If the ECB's policies significantly impact economic growth in the Eurozone, this could have spillover effects on the U.S. economy, potentially influencing the Fed's policy decisions. For example, strong growth in Europe can boost U.S. exports, while a recession in Europe could reduce them.


Since 2020, we have seen inflation rise above 9% for the first time in 40 years, historic bank collapses, rapid changes to oil prices, the most rapid rate hike cycle of all time, affordability deteriorating, and the lowest unemployment rate since 1969. We are living through the most resilient economy of all time.


Everyone is hoping for rate cuts, as quickly as possible in 2024 to improve inventory in the housing sector, and buyer demand. But is it too soon?  


Atlanta Federal Reserve President Raphael Bostic stated this morning that there is no immediate need for the Federal Reserve to lower U.S. interest rates due to the economy's strength and the ongoing effort to ensure inflation returns to the central bank's 2% target. Bostic mentioned that inflation is expected to decrease slowly over the next six months, implying that the Federal Reserve won't rush to reduce its restrictive stance. He anticipates two quarter-point rate cuts later in the year but underscores that current inflation rates are still too high. Bostic praised the economy's resilience, noting the unemployment rate has stayed below 4% despite the Fed increasing interest rates by 5.25 percentage points to control inflation. He acknowledged the challenges faced by households and businesses in adapting to these changes.


Contrary to investor expectations of a rate cut at the Fed's March meeting, Bostic emphasized the necessity of maintaining efforts to bring inflation down to the 2% target. With the Personal Consumption Expenditures price index indicating a 3% annual inflation rate in October, timing the rate cuts is crucial. Bostic stressed the importance of reducing rates in time to smoothly reach the 2% inflation target without causing a spike in unemployment. His primary goal is to align policy to minimize the economic hardships while achieving the inflation target.


Timing is everything. Read between the lines before sharing enticing headlines about where rates are headed. The important calculation for all homebuyers and seller is affordability. If it works now, seize the deal. If it doesn’t sit this one out. Rates will eventually improve, and the buyer pool with increase. We hope inventory can increase to balance demand, but it’s not likely it will keep up with a lower rate environment.


You cannot time the market. The best time to buy, is when you’re buying within your means.


Mark Zandi, the chief economist at Moody's Analytics, indicated that the era of sub-3% mortgage rates, seen during the pandemic, is unlikely to return soon. Speaking to CNBC, Zandi predicted that mortgage rates will stabilize at a higher level, around 5.5% to 6% in the foreseeable future. He explained that mortgage rates typically follow the trend of the 10-year Treasury yield, which he expects to remain between 4% and 4.5%. This correlation leads him to believe that mortgage rates will settle into the 5.5% to 6% range for the long term. This forecast suggests a significant shift from the pandemic-era lows, signaling a new normal for those planning to take on mortgages.


INFLATION TRENDS


The Consumer Price Index (CPI) saw a modest increase of 0.3% from November to December. Annually, the CPI rose from 3.1% to 3.4%, which is still near the lowest level in almost three years. Core CPI, excluding volatile food and energy prices, also went up by 0.3%, with its annual rate decreasing from 4% to 3.9%. Notably, this is the first time Core CPI has dipped below 4% in over two years.


Factors contributing to the inflation rise last month included higher costs for energy, used cars, and motor vehicle insurance. Elevated shelter costs also played a role, though reports indicate these are beginning to moderate, which should further reduce inflation.

In summary, inflation has shown significant improvement since its peak in 2022. The headline reading is now at 3.4%, down from 9.1%, and the core reading is at 3.9%, down from 6.6%. The Federal Reserve responded to the high inflation by initiating eleven rate hikes since March 2022, but paused these in their last three meetings in 2023 as inflation showed signs of cooling. This raises questions about whether the Fed might switch from rate hikes to cuts later this year.


In December, the Producer Price Index (PPI), which measures wholesale-level inflation, unexpectedly fell by 0.1%, and annually, it rose from 0.8% to 1%, also lower than anticipated. The core PPI remained unchanged for the month, with the annual rate decreasing from 2% to 1.8%. These figures suggest a continued easing of inflation, with the 1% year-over-year PPI reading in December marking a significant drop from the 2022 peak of 11.7%. Lower producer inflation often leads to reduced consumer inflation if savings are passed on to consumers.


Regarding housing, CoreLogic's Chief Economist, Dr. Selma Hepp, reported that home prices continued to rise in November despite high mortgage rates. The Home Price Index indicated a 0.2% increase from October to November, reaching a new all-time high for the seventh consecutive month, and a 5.2% increase compared to November 2022. CoreLogic predicts a 0.2% decrease in home prices in December and a 2.5% increase over the next year, although their forecasts have historically been conservative. In fact, CoreLogic's index is on track for a 7% appreciation in 2023, based on data from the first eleven months of last year. These trends underscore the continuing strength in the housing market and the value of homeownership as a wealth-building opportunity.unnamed (11)


MARKET MOVING NEWS


After the market closures on Monday in honor of the Martin Luther King Jr. holiday, housing data highlights this week’s calendar. Wednesday brings builder confidence for this month from the National Association of Home Builders. December’s Housing Starts and Building Permits follow on Thursday, while Existing Home Sales will be delivered on Friday.


Look for December’s Retail Sales on Wednesday and the latest Jobless Claims on Thursday.


WEALTH HACK OF THE WEEK

Buying a home in a high-rate environment with low inventory can have several benefits, including:


  1. Less Competition: In high-rate environments, some potential buyers might be discouraged due to higher mortgage costs. This can lead to less competition for homes, providing more negotiation power and a better selection of properties for those who are still in the market.


  2. Motivated Sellers: Sellers in a market with high interest rates and low inventory may be more motivated to sell, especially if they're facing fewer offers. This can lead to better deals, more room for negotiation, and potentially more favorable terms for the buyer.


  3. Potential for Rate Reductions in the Future: If interest rates are currently high, there's a strong possibility they will decrease in the near future. Buyers can potentially refinance their mortgages when rates drop, leading to lower monthly payments and overall interest savings over the life of the loan. We offer this option with $0 lender fees.


  4. Building Equity: Even in a high-rate environment, homeowners start building equity in their property as soon as they begin making mortgage payments. This can be beneficial over time, especially if the property value increases.


  5. Stable Monthly Payments with Fixed-Rate Mortgages: Unlike renting, where rent can increase over time, buying a home with a fixed-rate mortgage ensures that monthly payments remain consistent throughout the term of the loan, providing financial predictability and stability. There are fluctuating expenses, such as taxes, insurance and maintenance to consider. I can show you the financial benefit of renting instead of buying over the next 5-10 years.


Your situation is not like anyone else’s. Don’t compare. Make an appointment with me today to find out what you can be approved for. I look forward to serving you.

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